## Monday,
August 16, 2004

Book 2 of 2 Pages 50447–50994



# Part II



# Department of
Health and Human

Services

Centers for Medicare and Medicaid

Services

42 CFR Parts 410, 411, and 419
Medicare Program; Proposed Changes to the Hospital Outpatient Prospective Payment System and Calendar Year 2005 Payment Rates; Proposed Rule


### 50448 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

**DEPARTMENT OF HEALTH AND**
**HUMAN SERVICES**

**Centers for Medicare & Medicaid**
**Services**

**42 CFR Parts 410, 411, and 419**

**[CMS–1427–P]**

**RIN 0938–AM75**

**Medicare Program; Proposed Changes to the Hospital Outpatient Prospective**  **Payment System and Calendar Year 2005 Payment Rates** 

**AGENCY :**  Centers for Medicare & Medicaid Services (CMS), HHS.

**ACTION :**  Proposed rule.

**SUMMARY :**  This proposed rule would revise the Medicare hospital outpatient prospective payment system to implement applicable statutory requirements and changes arising from our continuing experience with this system and to implement certain related provisions of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. In addition, the proposed rule describes proposed changes to the
amounts and factors used to determine the payment rates for Medicare hospital outpatient services paid under the prospective payment system. These changes would be applicable to services furnished on or after January 1, 2005.

**DATES :**  To be ensured consideration,
comments must be received at one of the addresses provided below, no later than 5 p.m. on October 8, 2004.

**ADDRESSES :**  In commenting, please refer
to file code CMS–1427–P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX)

transmission.

You may submit comments in one of three ways (no duplicates, please):

1. Electronically: You may submit electronic comments

to http://www.cms.hhs.gov/regulations/

ecomments (attachments should be in Microsoft Word, WordPerfect, or Excel; however, we prefer Microsoft Word). You can assist us by referencing the

‘‘ specific identifier’’ that precedes the section on which you choose to

comment.

2. By Mail: You may mail written comments (one original and two copies) to the following
address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS–1427–P, P.O. Box 8010, Baltimore,

MD 21244–8018.

Please allow sufficient time for mailed
comments to be received before the close of the comment period. 3. By hand or courier: If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to one of the following addresses. If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786–7195 in advance to schedule your arrival with one of our staff
members.
Room 445–G, Hubert H. Humphrey

Building, 200 Independence Avenue, SW., Washington, DC 20201, or 7500 Security Boulevard, Baltimore, MD

21244–1850.
(Because access to the interior of the Hubert H. Humphrey Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain proof of filing by stamping in and retaining an extra copy of the comments being filed.)

Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period.

Submitting Comments: We welcome comments from the public on all issues set forth in this rule to assist us in fully considering issues and developing policies. You can assist us by referencing the file code CMS–1427–P and the specific ‘‘ issue identifier’’ that precedes the section on which you
choose to comment.

Inspection of Public Comments: All
comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential
business information that is included in
a comment. After the close of the comment period, CMS posts all
electronic comments received before the close of the comment period on its public web site. Written comments received timely will be available for public inspection as they are received, generally beginning approximately 4 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, MD 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone (410) 786–7195.

Submission of comments on paperwork requirements. For comments that relate to information collection requirements, mail a copy of comments to the following addresses: Centers for Medicare & Medicaid Services, Office of Strategic Operations and Regulatory Affairs, Security and Standards Group, Office of Regulations Development and Issuances, Room C4–24–02, 7500 Security Boulevard, Baltimore, MD 21244–1850, Attn: John Burke, CMS– 1427–P; and Office of Information and Regulatory

Affairs, Office of Management and Budget, Room 3001, New Executive Office Building, Washington, DC 20503, Christopher Martin, CMS Desk
Officer. Comments submitted to OMB may also be emailed to the following
address: Christopher

_ Martin@omb.eop.gov, or faxed to OMB at (202) 395–6974.

**FOR FURTHER INFORMATION CONTACT :**  Dana Burley, (410) 786–0378, Outpatient prospective payment issues and Suzanne Asplen, (410) 786–4558, Partial hospitalization and community
mental health center issues.

**SUPPLEMENTARY INFORMATION :**  Copies: To order copies of the Federal Register containing this document, send your request to: New Orders, Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 15250–7954. Specify the date of the issue requested and enclose a check or money order payable to the Superintendent of Documents, or enclose your Visa or Master Card number and expiration date. Credit card orders can also be placed by calling theorder desk at (202) 512–1800 (or tollfree at 1–888–293–6498) or by faxing to (202) 512–2250. The cost for each copy is $10. As an alternative, you can view and photocopy the Federal Register document at most libraries designated as Federal Depository Libraries and at many other public and academic libraries throughout the country that
receive the Federal Register

.

This Federal Register document is
also available from the Federal Register online database through GPO Access, a service of the U.S. Government Printing
Office. The web site address is: http:// www.gpoaccess.gov/fr/index.html.

To assist readers in referencing sections contained in this document, we are providing the following table of

contents.

Outline of Contents

I. Background
A. Legislative and Regulatory Authority for the Outpatient Prospective Payment System B. Excluded OPPS Services and Hospitals C. Prior Rulemaking D. APC Advisory Panel

1. Authority for the APC Panel
2. Establishment of the APC Panel


### 50449 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

3. APC Panel Meetings and Organizational

Structure E. Provisions of the Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 F. Summary of Major Content of This Proposed Rule

II. Proposed Changes Related to Ambulatory Payment Classifications (APCs)
A. Proposed APC Changes: General
B. APC Panel Review and Recommendations

1. APC 0018: Biopsy of Skin/Puncture of

Lesion 2. Level I and II Arthroscopy 3. Angiography and Venography Except

Extremity C. Limits on Variations Within APCs: Proposed Application of the 2 Times
Rule 1. Cardiac and Ambulatory Blood Pressure

Monitoring 2. Electrocardiograms 3. Excision/Biopsy 4. Posterior Segment Eye Procedures 5. Laparoscopy 6. Anal/Rectal Procedures 7. Nerve Injections 8. Anterior Segment Eye Procedures 9. Pathology

10. Immunizations 11. Pulmonary Tests
12. Clinic Visits D. Proposed Exceptions to the 2 Times Rule E. Coding for Stereostatic Radiosurgery

Services 1. Background 2. Proposal for CY 2005 F. Proposed Movement of Procedures From New Technology APCs to Clinically Appropriate APCs 1. Background
2. APC Panel Review and Recommendation 3. Proposal for CY 2005 G. Proposed Changes to Inpatient List H. Proposed Assignment of ‘‘ Unlisted ’’ HCPCS Codes 1. Background 2. Proposal for CY 2005 I. Proposed Addition of New Procedure
Codes J. Proposed OPPS Changes: Provisions of MMA (Pub. L. 108

– 173) 1. Payment for Initial Preventive Physical

Examinations (Section 611 of Pub. L.

108

– 173) a. Background b. Proposed Amendments to Regulations c. Proposed Assignment of New HCPCS

Code for Payment of Initial Preventive Physical Examinations d. Handling of Comments Received in

Response to This Proposal 2. Payment for Certain Mammography

Services (Section 614 of Pub. L. 108

– 173)

III. Proposed Recalibration of APC Weights
for CY 2005

A. Database Construction

1. Proposed Treatment of Multiple

Procedure Claims 2. Proposed Use of Single Procedure

Claims B. Proposed Calculation of Median Costs for

CY 2005 C. Proposed Adjustment of Median Costs for

CY 2005 1. Device-Dependent APCs 2. Proposed Treatment of Specified APCs a. APC 0315, Level II Implantation of

Neurostimulator b. APC 0651, Complex Interstitial

Radiation Application c. APC 0659, Hyperbaric Oxygen Therapy 3. Proposed Required Use of ‘‘ C ’’ Codes for

Devices
4. Submission of External Data D. Proposed Calculation of Scaled OPPS

Payment Weights

IV. Proposed Payment Changes for Devices
A. Pass-Through Payments for Devices

1. Expiration of Transitional Pass-Through

Payments for Certain Devices 2. Proposal for CY 2005B. Provisions for Reducing Transitional PassThrough Payments To Offset Costs Packaged Into APC Groups 1. Background 2. Proposal for CY 2005

V. Transitional Pass-Through Payment for Additional Costs of Drugs and Biologicals
A. New Drugs, Biologicals, andRadiopharmaceuticals With PassThrough Status 1. Background 2. Expiration in CY 2004 of Pass-Through

Status for Drugs and Biologicals3. Drugs and Biologicals With PassThrough Status in CY 2005 B. Drugs, Biologicals, andRadiopharmaceuticals Without PassThrough Status 1. Background 2. Proposed Criteria for Packaging Payment

for Drugs, Biologicals, and Radiopharmaceuticals 3. Proposed Payment for Drugs,

Biologicals, and Radiopharmaceuticals Without Pass-Through Status That Are Not Packaged a. Payment for Specified Covered

Outpatient Drugsb. Proposal to Treat Three Sunsetting PassThrough Drugs as Specified Covered Outpatient Drugs c. Proposed CY 2005 Payment for New

Drugs and Biologicals With HCPCS Codes and Without Pass-Through Application and Reference AWP d. Proposed Payment for Separately

Payable Nonpass-Through Drugs and Biologicals e. Proposed CY 2005 Change in Payment

Status for HCPCS Code J7308 C. Proposed Coding and Billing for Specified Outpatient Drugs D. Proposed Payment for New Drugs, Biologicals, and Radiopharmaceuticals Before HCPCS Codes Are Assigned 1. Background
2. Provisions of Pub. L. 108

– 173 E. Proposed Payment for Vaccines F. Proposed Changes in Payment for Single Indication Orphan Drugs G. Proposal To Change Payment Policy for Radiopharmaceuticals H. Proposed Coding and Payment for Drug
Administration I. Proposed Payment for Blood and Blood
Products VI. Estimated Transitional Pass-Through Spending in CY 2005 for Drugs, Biologicals,
and Devices

A. Basis for Pro Rata Reduction B. Proposed Estimate of Pass-Through Spending for CY 2005

VII. Other Policy Decisions and Proposed Policy Changes
A. Statewide Average Default Cost-to-Charge

Ratios B. Transitional Corridor Payments: Technical Change
C. Status Indicators and Comment Indicators Assigned in Outpatient Code Editor (OCE) 1. Payment Status Indicators
2. Comment Indicators
D. Observation Services E. Procedures That Will Be Paid Only as Inpatient Procedures F. Hospital Coding for Evaluation and Management Services 1. Background 2. Proposal for Evaluation and

Management Guidelines G. Brachytherapy Payment Issues H. Payment for APC 0375, Ancillary Outpatient Services When Patient Expires

VIII. Proposed Conversion Factor Update for

CY 2005

IX. Proposed Wage Index Changes for CY

2005

X. Determination of Proposed Payment Rates and Outlier Payments for CY 2005
A. Calculation of the Proposed National Unadjusted Medicare Payment B. Proposed Hospital Outpatient Outlier Payments C. Proposed Payment for Partial Hospitalization 1. Background 2. Proposed PHP APC Update for CY 2005 3. Separate Threshold for Outlier Payments

to CMHCs

XI. Proposed Beneficiary Copayments for CY

2005 A. Background B. Proposed Copayment for CY 2005

XII. MedPAC Recommendations

XIII. Addenda Files Available to the Public

Via Internet

Addendum C

— Healthcare Common

Procedure Coding System (HCPCS) Codes by Ambulatory Payment Classification (APC)

XIV. Collection of Information Requirements

XV. Response to Public Comments

XVI. Regulatory Impact Analysis

A. OPPS: General B. Impact of Proposed Changes in This Proposed Rule
C. Alternatives Considered D. Limitations of Our Analysis E. Estimated Impacts of This Proposed Rule on Hospitals F. Projected Distribution of Outlier Payment G. Estimated Impacts of This Proposed Rule
on Beneficiaries


### 50450 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

XVII. Regulation Text

Addenda

Addendum A

— List of Ambulatory Payment

Classification (APCs) With Status Indicators, Relative Weights, Payment Rates, and Copayment Amounts for CY

2005 Addendum B

— Payment Status by HCPCS

Code and Related Information

— CY 2005
Addendum C

— Healthcare Common

Procedure Coding System (HCPCS) Codes by Ambulatory Payment Classification (APC) (Available only on CMS Website via Internet. See section XIII. of the preamble of this proposed rule.)
Addendum D1

— Payment Status Indicators

for Hospital Outpatient Prospective Payment System
Addendum D2

— Comment Indicators
Addendum E

— CPT Codes That Will Be Paid

Only as Inpatient Procedures
Addendum H

— Wage Index for Urban Areas
Addendum I

— Wage Index for Rural Areas Addendum J

— Wage Index for Hospitals That

Are Reclassified
Addendum K

— Wage Index Adjustment for

Commuting Hospital Employees
Addendum L

— Pre-Reclassified Wage Index

for Urban Areas
Addendum M

— Pre-Reclassified Wage Index

for Rural Areas
Addendum N

— Hospital Reclassifications

and Redesignations by Individual Hospital
Under Section 508 of Pub.L. 108

– 173
Alphabetical List of Acronyms Appearing in the Proposed Rule
ACEP American College of Emergency

Physicians AHA American Hospital Association
AHIMA American Health Information

Management Association AMA American Medical Association APC Ambulatory payment

classification ASP Average sales price ASC Ambulatory surgical center AWP Average wholesale price BBA Balanced Budget Act of 1997,

Pub. L. 105

– 33 BIPA Medicare, Medicaid, and SCHIP

Benefits Improvement and Protection Act of 2000, Pub. L. 106

– 554 BBRA Medicare, Medicaid, and SCHIP

Balanced Budget Refinement Act of 1999, Pub. L. 106

– 113 CAH Critical access hospitalCCR (Cost center specific) cost-tocharge ratio CMHC Community mental health

center CMS Centers for Medicare & Medicaid

Services (formerly known as the Health Care Financing Administration) CORF Comprehensive Outpatient

Rehabilitation Facility CPT [Physicians ’ ] Current Procedural

Terminology, Fourth Edition, 2004, copyrighted by the American Medical

Association CRNA Certified Registered Nurse
Anesthetist CY Calendar year DMEPOS Durable medical equipment,

prosthetics, orthotics, and supplies DMERC Durable Medical Equipment

Regional Carrier DRG Diagnosis-related group DSH Disproportionate share hospital EACH Essential Access Community

Hospital E/M Evaluation and management EPO Erythropoietin ESRD End-stage renal disease FACA Federal Advisory Committee

Act, Pub. L. 92

– 463 FDA Food and Drug Administration FI Fiscal intermediary FSS Federal Supply Schedule FY Federal fiscal year HCPCS Healthcare Common Procedure

Coding System HCRIS Hospital Cost Report

Information System HHA Home health agency HIPAA Health Insurance Portability

and Accountability Act of 1996, Pub.

L. 104

– 191 ICD

– 9

– CM International Classification

of Diseases, Ninth Edition, Clinical
Modification IME Indirect medical education IPPS (Hospital) inpatient prospective

payment system IVIG Intravenous immune globulin LTC Long-term care MedPAC Medicare Payment Advisory

Commission MDH Medicare dependent hospital MMA Medicare Prescription Drug,

Improvement, and Modernization Act of 2003, Pub. L. 108

– 173 MSA Metropolitan Statistical Area NCD National Coverage Determination OCE Outpatient code editor OMB Office of Management and

Budget OPD (Hospital) outpatient department OPPS (Hospital) outpatient

prospective payment system PET Positron Emission Tomography PHP Partial hospitalization program PM Program memorandum PPI Producer Price Index PPS Prospective payment system PPV Pneumococcal pneumonia (virus) PRA Paperwork Reduction Act QIO Quality Improvement

Organization RFA Regulatory Flexibility Act
RRC Rural referral center
SBA Small Business Administration SCH Sole community hospital SDP Single drug pricer
SI Status indicator TEFRA Tax Equity and Fiscal

Responsibility Act of 1982, Pub. L.

97

– 248 TOPS Transitional outpatient

payments USPDI United States Pharmacopoeia Drug Information

I. Background

A. Legislative and Regulatory Authority for the Outpatient Prospective Payment System

When the Medicare statute was originally enacted, Medicare payment for hospital outpatient services was based on hospital-specific costs. In an
effort to ensure that Medicare and its beneficiaries pay appropriately for services and to encourage more efficient delivery of care, the Congress mandated replacement of the cost-based payment methodology with a prospective payment system (PPS). The Balanced Budget Act of 1997 (BBA) (Pub. L. 105

– 33), enacted on August 5, 1997, added section 1833(t) to the Social Security Act (the Act) authorizing implementation of a PPS for hospital outpatient services. The Balanced Budget Refinement Act of 1999 (BBRA) (Pub. L. 106

– 113), enacted on November 29, 1999, made major changes that affected the hospital outpatient PPS (OPPS). The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. L.

106

– 554), enacted on December 21, 2000, made further changes in the OPPS. Section 1833(t) of the Act was also recently amended by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. 108

– 173, enacted on December 8, 2003 (these
amendments are discussed later under section I.E. of this proposed rule). The OPPS was first implemented for services furnished on or after August 1, 2000. Implementing regulations for the OPPS are located at 42 CFR part 419.

Under the OPPS, we pay for hospital outpatient services on a rate-per-service basis that varies according to the ambulatory payment classification (APC) group to which the service is assigned. We use Healthcare Common Procedure Coding System (HCPCS) codes (which include certain Current Procedural Terminology (CPT) codes) and descriptors to identify and group
the services within each APC. The OPPS includes payment for most hospital outpatient services, except those
identified in section I.B. of this proposed rule and certain inpatient
services covered under Medicare Part B
for beneficiaries who are entitled to Part
B benefits but who have exhausted them
or otherwise are not entitled to them. In addition, the OPPS applies to partial hospitalization services furnished by community mental health centers (CMHCs).


### 50451 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

1 Interim final rule with comment period, August 3, 2000 (65 FR 47670); interim final rule with comment period, November 13, 2000 (65 FR 67798);
final rule and interim final rule with comment period, November 2, 2001 (66 FR 55850 and 55857); final rule, November 30, 2001 (66 FR 59856); final rule, December 31, 2001 (66 FR 67494); final rule, March 1, 2002 (67 FR 9556); final rule, November 1, 2002 (67 FR 66718); interim final rule with comment period, November 7, 2003 (68 FR 63398); and interim final rule with comment period, January 6, 2004 (69 FR 820). The OPPS rate is an unadjusted national payment amount that includes the Medicare payment and the beneficiary copayment. This rate is
divided into a labor-related amount and
a nonlabor-related amount. The laborrelated amount is adjusted for area wage differences using the inpatient hospital wage index value for the locality in which the hospital or CMHC is located.

All services and items within an APC are comparable clinically and with respect to resource use (section 1833(t)(2)(B) of the Act). In accordance with section 1833(t)(2) of the Act, subject to certain exceptions, services and items within an APC group cannot be considered comparable with respect to the use of resources if the highest median (or mean cost, if elected by the Secretary) for an item or service in the APC is more than 2 times greater than
the lowest median cost for an item or service with the same APC (referred to
as the ‘‘ 2 times rule ’’ ). In implementing this provision, we use the median cost of the item or service assigned to an

APC.

Special payments under the OPPS may be made for new technology items and services in one of two ways. Section 1833(t)(6) of the Act provides for temporary additional payments or

‘‘ transitional pass-through payments ’’ for certain drugs, biological agents, brachytherapy devices used for the treatment of cancer, and categories of
medical devices for at least 2 but not more than 3 years. For new technologyservices that are not eligible for passthrough payments and for which we lack sufficient data to appropriately assign them to a clinical APC, we have established special APC groups based on costs, which we refer to as APC cost
bands. These cost bands allow us to price these new procedures more appropriately and consistently. Like the pass-through payments, these special payments for new technology services are also temporary; that is, we retain a service within a new technology APC group until we acquire adequate data to assign it to a clinically appropriate APC.

B. Excluded OPPS Services and Hospitals

Section 1833(t)(1)(B)(i) of the Act authorizes the Secretary to designate the hospital outpatient services that are paid under the OPPS. While most hospital outpatient services are payable under the OPPS, section 1833(t)(1)(B)(iv) of the Act excluded payment for ambulance, physical andoccupational therapy, and speechlanguage pathology services, for which payment is made under a fee schedule. The Secretary exercised the broad authority granted under the statute to
exclude from the OPPS those services that are already paid under fee schedules or other payment systems. Such excluded services include, for example, the professional services of physicians and nonphysician practitioners paid under the Medicare physician fee schedule; laboratory services paid under the clinical diagnostic laboratory fee schedule; services for beneficiaries with end-stage renal disease (ESRD) that are paid under the ESRD composite rate; and services and procedures that require an inpatient stay that are paid under the hospital inpatient prospective payment system (IPPS). We set forth the services that are excluded from payment under the OPPS

in § 419.22 of the regulations.

Under § 419.20 of the regulations, we specify the types of hospitals and entities that are excluded from payment
under the OPPS. These excluded entities include Maryland hospitals, but only for services that are paid under a
cost containment waiver in accordance with section 1814(b)(3) of the Act; critical access hospitals (CAHs); hospitals located outside of the 50 States, the District of Columbia, and Puerto Rico; and Indian Health Service hospitals.

C. Prior Rulemaking

On April 7, 2000, we published in the Federal Register a final rule with comment period (65 FR 18434) to implement a prospective payment system for hospital outpatient services. The hospital OPPS was first implemented for services furnished on or after August 1, 2000. Section 1833(t)(9) of the Act requires the Secretary to review certain components of the OPPS not less often than annually and to revise the groups, relative payment weights, and other adjustments to take into account changes in medical practice, changes in technology, and the addition of new services, new cost data,
and other relevant information and factors. Since implementing the OPPS, we have published final rules in the Federal Register annually to implement statutory requirements and changes arising from our experience with this system. For a full discussion of the changes to the OPPS, we refer readers to
these Federal Register final rules. 1 On November 7, 2003, we published a final rule with comment period in the Federal Register (68 FR 63398) that revised the OPPS to update the payment weights and conversion factor for services payable under the calendar year (CY) 2004 OPPS on the basis of claims data from April 1, 2002 through December 31, 2002. Subsequent to publishing the November 7, 2003 final rule with comment period, we published a correction of the final rule with comment period on December 31, 2003 (68 FR 75442). That document
corrected technical errors in the November 7, 2003 rule and included responses to a number of public comments that were inadvertently
omitted from that rule.

On January 6, 2004, we published in
the Federal Register an interim final rule with comment period (69 FR 820) that implemented provisions of Pub. L.

108

– 173 that affected payments made under the OPPS, effective January 1,
2004. We will finalize this interim final rule and address public comments
associated with that rule when we finalize this proposed rule.

D. APC Advisory Panel

1. Authority of the APC Panel

Section 1833(t)(9)(A) of the Act, as amended by section 201(h) of the BBRA of 1999, requires that we consult with an outside panel of experts to review the clinical integrity of the payment groups and weights under the OPPS. The Advisory Panel on APC Groups (the APC Panel), discussed under section I.D.2. of this preamble, fulfills this requirement. The Act further specifies that the Panel will act in an advisory capacity. This expert panel, which is to be composed of 15 representatives of providers subject to the OPPS (currently employed full-time, not consultants, in their respective areas of expertise),
reviews and advises us about the clinical integrity of the APC groups and their weights. The APC Panel is not restricted to using our data and may use data collected or developed by organizations outside the Department in conducting its review.

2. Establishment of the APC Panel

On November 21, 2000, the Secretary signed the charter establishing the Advisory Panel on APC Groups. The
APC Panel is technical in nature and is governed by the provisions of the Federal Advisory Committee Act (FACA), as amended (Pub. L. 92

– 463). On November 1, 2002, the Secretary


### 50452 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

renewed the charter. The renewed
charter indicates that the APC Panel continues to be technical in nature, is governed by the provisions of the FACA, may convene up to three meetings per year, and is chaired by a
Federal official.

Originally, in establishing the APC Panel, we solicited members in a notice published in the Federal Register on December 5, 2000 (65 FR 75943). We received applications from more than 115 individuals nominating either colleagues or themselves. After carefully reviewing the applications, we chose 15 highly qualified individuals to serve on
the APC Panel. Because of the loss of
four APC Panel members due to the expiration of terms of office on March 31, 2004, we published a Federal Register notice on January 23, 2004 (69 FR 3370) that solicited nominations for APC Panel membership. From the 24 nominations that we received, we chose
four new members. The entire APC Panel membership is identified on the
CMS website at www.cms.hhs.gov/faca/ apc/apcmem.asp

. 3. APC Panel Meetings and Organizational Structure

The APC Panel first met on February 27, February 28, and March 1, 2001. Since that initial meeting, the APC Panel has held four subsequent meetings, with the last meeting taking place on February 18, 19, and 20, 2004. Prior to each of these biennial meetings, we published a notice in the Federal Register to announce each meeting and, when necessary, to solicit nominations for APC Panel membership. For a more
detailed discussion about these announcements, refer to the following Federal Register notices: December 5, 2000 (65 FR 75943), December 14, 2001 (66 FR 64838), December 27, 2002 (67 FR 79107), July 25, 2003 (68 FR 44089), and December 24, 2003 (68 FR 74621).

During these meetings, the APC Panel established its operational structure which, in part, includes the use of three subcommittees to facilitate its required APC review process. Currently, the
three subcommittees are the Data Subcommittee, the Observation Subcommittee, and the Packaging
Subcommittee. The Data Subcommittee is responsible for studying the data issues confronting the APC Panel and for recommending viable options for resolving them. This subcommittee was initially established on April 23, 2001,
as the Research Subcommittee and
reestablished as the Data Subcommittee on April 13, 2004. The Observation Subcommittee (established on June 24, 2003, and reestablished with new members on March 8, 2004) reviews and makes recommendations to the APC Panel on all issues pertaining to observation services paid under the OPPS, such as coding and operational issues. The Packaging Subcommittee, which was established on March 8, 2004, studies and makes recommendations on issues pertaining to services that are not separately payable under the OPPS but are bundled or packaged into the APC payment. Each of these subcommittees was established by a majority vote of the APC Panel during a scheduled annual or biennial APC Panel meeting. All
subcommittee recommendations are discussed and voted upon by the full
APC Panel.

For a detailed discussion of the APC Panel meetings, refer to the hospital
OPPS final rules cited in section I.C. of this preamble. A full discussion of the
APC Panel ’ s February 2004 meeting and the resulting recommendations is included in sections II., III., IV., V., and VI. of this preamble.

E. Provisions of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003

On December 8, 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), Pub.

L. 108

– 173, was enacted. Pub. L. 108

– 173 made changes to the Act relating to the Medicare OPPS. In a January 6, 2004 interim final rule with comment period, we implemented provisions of Pub. L.

108

– 173 relating to the OPPS that were effective for CY 2004. In this proposed rule, we are proposing to implement the following sections of Pub. L. 108

– 173 that are effective for CY 2005:

• Section 611, which provides for Medicare coverage of an initial preventive physical examination under Part B, subject to the applicable deductible and coinsurance, as an outpatient department (OPD) service payable under the OPPS. The provisions of section 611 apply to services furnished on or after January 1, 2005, but only for individuals whose coverage period under Medicare Part B begins on
or after that date.

• Section 614, which provides that screening mammography and diagnostic mammography services are excluded from payment under the OPPS. This amendment applies to screening mammography services furnished on or
after the date of enactment of Pub. L.

108

– 173 (that is, December 8, 2003), and in the case of diagnostic mammography, to services furnished on or after January

1, 2005.

• Section 621(a)(1), which requires special classification of certain separately paid radiopharmaceutical agents and drugs or biologicals, and specifies the pass-through payment percentages, effective for services furnished on or after January 1, 2005, for the three categories of ‘‘ specified covered OPD drugs ’’ defined in the statute: sole source drug; innovator multiple source drug; and noninnovator multiple source drug. In addition, payment for these drugs for CYs 2004
and 2005 does not have to be made in a budget neutral manner.

• Section 621(a)(2), which specifies
the reduced threshold for the establishment of separate APCs with respect to drugs or biologicals from $150 to $50 per administration for drugs and biologicals furnished in CYs 2005 and

2006.

• Section 621(a)(3), which excludes separate drug APCs from outlier payments. Specifically, no additional payment will be made in the case of APC groups established separately for drugs and biologicals.

• Section 621(b), which requires that all devices of brachytherapy consisting of a seed or seeds (or radioactive source) furnished on or after January 1, 2004, and before January 1, 2007, be paid based on the hospital ’ s charges for each device, adjusted to cost. This provision also requires that these brachytherapy
services be excluded from outlier payments.
F. Summary of Major Content of This Proposed Rule

In this proposed rule, we are setting forth proposed changes to the Medicare hospital OPPS. These changes would be
effective for services furnished on or after January 1, 2005. The following is a summary of the major changes that we are proposing to make:

1. Proposed Changes to the APCs Groups

As required by section 1833(t)(9)(A) of the Act, we are proposing the annual update of the APC groups and the relative payment weights. This section also requires that we consult with an outside panel of experts, the Advisory Panel on APC Groups, to review the clinical integrity of the groups and weights under the OPPS. Based on analyses of Medicare claims data and recommendations of the APC Panel, we are proposing to establish a number of new APCs and to make changes to the assignment of HCPCS codes under a number of existing APCs. Our proposed APC changes for CY 2005 are set forth in section II. of this preamble.

We also discuss the application of the 2 times rule and proposed exceptions to it; coding for stereotactic radiosurgery services; the proposed movement of


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procedures from the new technology APCs; the proposed changes to the list of procedures that will be paid as inpatient services; and the proposed additions of new procedure codes to the

APCs.

2. Recalibrations of APC Relative Payment Weights

In section III. of this preamble, we discuss the methodology used to recalibrate the proposed APC relative payment weights and set forth the proposed recalibration of the relative weights for CY 2005.

3. Proposed Payment Changes for

Devices

In section IV. of this preamble, wediscuss proposed changes to the passthrough payment for devices and the methodology used to reduce transitional pass-through payments to offset costs packaged into APC groups.

4. Proposed Payment Changes for Drugs, Biologicals, Radiopharmaceutical Agents, and Blood and Blood Products

In section V. of this preamble, we discuss our proposed payment changes for drugs, biologicals, radiopharmaceutical agents, and blood and blood products.

5. Pro Rata Reduction for Transitional Pass-Through Drugs, Biologicals, and

Devices

In section VI. of this preamble, we discuss the proposed methodology for measuring whether there should be an estimated pro rata reduction for transitional pass-through drugs, biologicals, and devices for CY 2005.

6. Other Policy Decisions and Proposed Policy Changes

In section VII. of this preamble, we present our proposals for CY 2005 regarding the following:

• Update of statewide default cost-tocharge ratios.

• A conforming change to the regulation relating to the use of the first available cost reporting period ending
after 1996 and before 2001 for determining a provider ’ s payment-tocost ratio to calculate transitional corridor payments for hospitals paid
under the OPPS that did not have a 1996 cost report.

• Proposed changes in the status
indicators and comment indicators assigned to APCs for CY 2005.

• Proposed elimination of the diagnostic tests criteria as a requirement for hospitals to qualify for separate payment of observation services under APC 0339 (Observation) and changes to the guidelines to hospitals for counting patients time spent in observation care. • Proposed payment under the OPPS for certain procedures currently assigned to the inpatient list.

• Proposed strategy for giving the public notice of new implementation guidelines for new evaluation and management codes.

• Proposed addition of three new HCPCS codes and descriptors for brachytherapy sources that would be paid separately, pursuant to Pub. L.

108

– 173.

• Proposed modification of the HCPCS code descriptors for brachytherapy source descriptors for which units of payment are not already
delineated.

• Proposed payment for services furnished emergently to an outpatient who dies before admission to a hospital as an inpatient.

7. Proposed Conversion Factor Update
for CY 2005

As required by section 1833(5)(3)(C)(ii) of the Act, under section VIII. of this preamble, we are proposing to update the conversion factor used to determine payment rates
under the OPPS for CY 2005.

8. Proposed Wage Index Changes for CY

2005

In section IX. of this preamble, we discuss the proposed retention of our current policy to apply the IPPS wage indices to wage adjust the APC median costs in determining the OPPS payment rate and the copayment standardized amount. These indices reflect proposed major changes for CY 2005 relating to hospital labor market areas as a result of OMB revised definitions of geographical statistical areas; hospital reclassifications and redesignations, including the one-time reclassifications
under section 508 of Pub. L. 108

– 173; and the wage index adjustment based on commuting patterns of hospital employees under section 505 of Pub. L.

108

– 173.
9. Determination of Payment Rates and Outlier Payments for CY 2005

In section X. of this preamble, we discuss how APC payment rates are calculated and how the payment rates are adjusted to reflect geographic
differences in labor-related costs. This section also discusses proposed changes in the way we calculate outlier payments for CY 2005.

10. MedPAC Recommendations

Under section 1805(b) of the Act, the Medicare Payment Advisory Committee (MedPAC) is required to submit a report to Congress, no later than March 1 of each year, that reviews and makes recommendations on Medicare payment policies. This annual report makes recommendations concerning the hospital outpatient prospective payment system. In section XII. of this preamble,
we discuss the MedPAC
recommendations. For further information relating specifically to the MedPAC March 1, 2004 report or to obtain a copy of the report, visit
MedPAC ’ s Web site at: http:// www.medpac.gov

. 11. Regulatory Impact Analysis

In section XV. of this preamble, we set forth our analysis of the impact that the proposed changes contained in this proposed rule would have on affected hospitals and CMHCs.

II. Proposed Changes Related to Ambulatory Payment Classifications (APCs)

[If you choose to comment on issues in this section, please indicate the caption ‘‘ APC Groups ’’ at the beginning of your comment.]

Section 1833(t)(2)(A) of the Act requires the Secretary to develop a classification system for covered hospital outpatient services. Section 1833(t)(2)(B) provides that this classification system may be composed of groups of services, so that services within each group are comparable clinically and with respect to the use of
resources. In accordance with these provisions, we developed a grouping classification system, referred to as the Ambulatory Payment Classifications Groups or APCs, as set forth in § 419.31 of the regulations. We use Healthcare Common Procedure Coding System (HCPCS) codes and descriptors to identify and group the services within each APC. The APCs are organized such that each group is homogeneous both clinically and in terms of resource use. (However, new technology APCs that are temporary groups for certain approved services are structured based on cost rather clinically homogeneity.) Using this classification system, we have established distinct groups of surgical, diagnostic, and partial hospitalization services, and medicalvisits. Because of the transitional passthrough provisions, we also have developed separate APC groups for certain medical devices, drugs, biologicals, radiopharmaceuticals, and devices of brachytherapy.

We have packaged into each procedure or service within an APC the
cost associated with those items or services that are directly related and integral to performing a procedure or furnishing a service. Therefore, we would not make separate payment for


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packaged items or services. For example, packaged items and services include: use of an operating, treatment, or procedure room; use of a recovery room; use of an observation bed; anesthesia; medical/surgical supplies; pharmaceuticals (other than those for which additional payment may beallowed under the transitional passthrough provisions discussed in section V. of this preamble); and incidental services such as venipuncture. Our packaging methodology is discussed in section IV.B.3. of this proposed rule.

A. Proposed APC Changes: General

Under the OPPS, we pay for hospital outpatient services on a rate-per-service basis that varies according to the APC group to which the service is assigned. Each APC weight represents the median hospital cost of the services included in that APC relative to the median hospital
cost of the services included in APC 601, Mid-Level Clinic visits. The APC weights are scaled to APC 601 because
a mid-level clinic visit is one of the most frequently performed services in the outpatient setting.

Section 1833(t)(9)(A) of the Act requires the Secretary to review the components of the OPPS not less than annually and to revise the groups and relative payment weights and make other adjustments to take into account changes in medical practice, changes in technology, and the addition of new services, new cost data, and other
relevant information and factors. Section 1833(t)(9)(A) of the Act, as amended by section 201(h) of the BBRA of 1999, also requires the Secretary, beginning in CY 2001, to consult with an outside panel of experts to review the APC groups and the relative payment weights.

Finally, section 1833(t)(2) of the Act provides that, subject to certain exceptions, the items and services within an APC group cannot be considered comparable with respect to the use of resources if the highest median (or mean cost, if elected by the Secretary) for an item or service in the group is more than 2 times greater than
the lowest median cost for an item or service within the same group (referred
to as the ‘‘ 2 times rule ’’ ). We use the
median cost of the item or service in implementing this provision. The statute authorizes the Secretary to make exceptions to the 2 times rule in unusual cases, such as low volume
items and services.

Section 419.31 of the regulations sets forth the requirements for the APC system and determination of the payment weights. In this section, we discuss the changes that we are proposing to the APC groups; the APC
Panel ’ s review and recommendations and our proposals in response to those recommendations; the application of the 2 times rule and proposed exceptions to it; coding for stereotactic radiosurgery services; the proposed movement of procedures from the new technology APCs; the proposed changes to the inpatient list; and the proposed additions of new procedures codes to
the APCs.

B. APC Panel Review and
Recommendations

As stated above, the APC Panel met on February 18, 19, and 20, 2004, to
discuss the revised APCs for the CY 2005 OPPS. In preparation for that meeting, we published a notice in the Federal Register on December 24, 2004 (68 FR 74621), to announce the location, date, and time of the meeting; the agenda items; and the fact that the meeting was open to the public. In that notice, we solicited public comment specifically on the items included on the agenda for that meeting. We also provided information about the APC Panel meeting on the CMS website: www.cms.hhs.gov/faca/apc/panel.

Oral presentations and written comments submitted for the February 2004 APC Panel meeting met, at a minimum, the adopted guidelines for presentations set forth in the Federal Register document (68 FR 74621). Below is a summary of the APC issues discussed by the APC Panel, its recommendations, and our proposals with respect to those recommendations.
The discussion in this section is limited to proposed APC changes regarding
APCs other than those that violate the 2 times rule and those that representdrugs, biologicals, and transitional passthrough devices, or those that are new technology APCs. The specific APC
Panel review and recommendations applicable to those APCs are discussed in sections II.C., IV., III., and II.F., respectively, of the preamble to this proposed rule. In conducting its APC review, the APC Panel heard testimony and received evidence in support of the
testimonies from a number of interested parties. The APC Panel also used hospital outpatient claims data for the period January 1, 2003, through September 30, 2003, that provided, at a minimum, median costs for the APC structure in place in CY 2004 and that was based on cost-to-charge ratios used for setting the CY 2004 payment rates. The data set presented to the APC Panel represented 9 months of the CY 2003 data that we are proposing to use to recalibrate the APC relative weights and to calculate the proposed APC payment rates for CY 2005. For this discussion, we are using the APC titles as published in our November 7, 2003 final rule with comment period, which were the APC
titles that existed when the APC Panel met in February 2004. Because we are proposing to retitle some of the APCs, the titles used in this discussion may
not be the same as those listed in Addendum A to this proposed rule.

1. APC 0018: Biopsy of Skin/Puncture of

Lesion

One presenter requested that the APC Panel recommend moving CPT tracking codes 0046T (Catheter lavage, mammary duct(s)) and 0047T (Each additional duct) from APC 0018 and placing them in an APC that more accurately reflects each of the procedures. The APC Panel recommended that we reassign CPT codes 0046T and 0047T to APC 0021, Level III Excision/Biopsy.

We are proposing to accept the APC
Panel ’ s recommendation.

2. Level I and II Arthroscopy

APC 0041: Level I Arthroscopy APC 0042: Level II Arthroscopy

We testified before the APC Panel regarding a comment that we received in 2003 requesting that we reassign CPT code 29827 (Arthroscopy, shoulder with rotator cuff repair) from APC 0041 to APC 0042, based on its similarity to CPT 29826 (Arthroscopy, shoulder decompression of subacromial space with partial acromioplasty without coracoacromial release). Our clinical staff considered the request and
determined that APCs 0041 and 0042 should be reconfigured to improve clinical homogeneity. An APC Panel presenter provided evidence to support moving CPT code 29827 to an APC that would more accurately recognize the complexity of that procedure. We requested the APC Panel ’ s recommendation regarding a total
revision of these two APCs.

The APC Panel recommended that we
reevaluate the codes in APCs 0041 and 0042 and propose restructuring that would improve the clinical homogeneity in the two APCs.

We are proposing to accept the APC
Panel ’ s recommendation and to revise
APCs 0041 and 0042 as shown in Tables
1 and 2 below.

**BILLING CODE 4120**

**– 01** 

**– P** 


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3. Angiography and Venography Except Extremity

APC 0279: Level II Angiography and

Venography Except Extremity APC 0280: Level III Angiography and

Venography Except Extremity APC 0668: Level I Angiography and

Venography Except Extremity
As requested by the APC Panel, we presented our proposal for reconfiguring APCs 0279, 0280, and 0668 that reflected changes based on prior input with outside clinical experts. The APC Panel had previously reviewed these APCs during its January 2003 meeting
and had recommended that we not
restructure these three APCs until we received input from clinical experts in the field. When we updated the APC groups in CY 2003, we accepted the
APC Panel ’ s recommendation and made no changes to APCs 0279, 0280, and

0668.

A review of these APCs was prompted by a commenter who requested that we move CPT code 75978 (Repair venous blockage) from APC 0668 to APC 0280
and that we move CPT code 75774 (Artery x-ray, each vessel) from APC
0668 to APC 0279. The commenter submitted evidence in support of these requests and testified before the APC Panel regarding the common use of CPT code 75978 for treating dialysis patients and the often required multiple intraoperative attempts to succeed with this procedure for such patients.

After receiving input from the clinical experts, we determined that these three APCs should be revised to improve their clinical homogeneity. We presented our proposed restructuring of APCs 0279, 0280, and 0668 to the APC Panel. The APC Panel concurred with our proposal.

In addition, subsequent to the APC Panel meeting, we discovered several procedures in these APCs that were more appropriately placed in another APC in order to remedy any 2 times rule violations. Tables 3, 4, and 5 reflect those additional APC reassignments as well as those we presented to the APC Panel in February 2004.


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C. Limits on Variations Within APCs: Proposed Application of the 2 Times
Rule

Section 1833(t)(2) of the Act provides
that the items and services within an APC group cannot be considered comparable with respect to the use of resources if the median of the highest
cost item or service within an APC group is more than 2 times greater than
the median of the lowest cost item or service within that same group. However, the statute authorizes the Secretary to make exceptions to this
limit on the variation of costs within each APC group in unusual cases such
as low volume items and services. No exception may be made in the case of a drug or biological that has been designated as an orphan drug under section 526 of the Federal Food, Drug, and Cosmetic Act. We implemented this statutory provision in § 419.31 of the regulations. Under this regulation, we elected to use the highest median cost
and lowest median cost to determine comparability.

During the APC Panel ’ s February 2004 meeting, we presented data and information concerning a number of APCs that violate the 2 times rule and
asked the APC Panel for its
recommendation. We discuss below the
APC Panel ’ s recommendations specific to each of these APCs and our proposals in response to the APC Panel ’ s recommendations.

1. Cardiac and Ambulatory Blood Pressure Monitoring
APC 0097: Cardiac and Ambulatory

Blood Pressure Monitoring We expressed concern to the APC Panel that APC 0097 appears to violate the 2 times rule. We sought the APC
Panel ’ s recommendation on revising the
APC to address the violation. Based on clinical homogeneity considerations, the
APC Panel recommended that we not
restructure APC 0097 for CY 2005.

We are proposing to accept the APC
Panel ’ s recommendation that we make no changes to APC 0097 for CY 2005.

2. Electrocardiograms
APC 0099: Electrocardiograms

We expressed concern to the APC Panel that APC 0099 appears to violate
the 2 times rule. We asked the APC Panel to recommend options for resolving this violation. Based on clinical homogeneity considerations, the
APC Panel recommended that we not
alter the structure of APC 0099 for CY

2005.

We are proposing to accept the APC
Panel ’ s recommendation that we make no changes to APC 0099 for CY 2005.

3. Excision/Biopsy
APC 0019: Level I Excision/Biopsy APC 0020: Level II Excision/Biopsy APC 0021: Level III Excision/Biopsy

We expressed concern to the APC Panel that APC 0019 appears to violate
the 2 times rule. We advised the APC
Panel that this violation was not evident
in CY 2004 because the CY 2002 median cost data used in calculating the CY 2004 APC updates supported moving CPT codes 11404 (Removal of skin lesion) and 11623 (Removal of skin lesion) from APC 0020 and APC 0021. However, based on the CY 2003 data reviewed by the APC Panel, APC 0019
would violate the 2 times rule. Therefore, we asked the APC Panel to recommend an approach to resolve the
violation. We asked the APC Panel if we should leave this APC as is; divide APC 0019 into two separate APCs; or move some codes in APC 0019 to higher level


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excision/biopsy APCs. In making its recommendation, the APC Panel noted
that the 2 times violation in APC 0019 was minor, and recommended that we not modify APC 0019.

We are proposing to accept the APC
Panel ’ s recommendation to not make any modifications to APC 0019 for CY

2005.
4. Posterior Segment Eye Procedures
APC 0235: Level I Posterior Segment

Eye Procedures We expressed concern to the APC Panel that APC 0235 appears to violate the 2 times rule. At the August 2003 APC Panel meeting, the APC Panel
recommended that we monitor the data for APC 0235 for review at its February 2004 meeting. In order to address the apparent violation, we asked the APC Panel to consider moving a few CPT codes from APC 0235 into a higher level posterior segment eye procedure APC.
The APC Panel noted that the 2 times violation in APC 0235 was minor, and recommended that we not change APC

0235.

We are proposing to accept the APC
Panel ’ s recommendation that we make no changes to the structure of APC 0235
for CY 2005.

5. Laparoscopy

APC 0130: Level I Laparoscopy APC 0131: Level II Laparoscopy

We expressed concern to the APC Panel that APC 0130 appears to violate the 2 times rule. We suggested moving CPT code 44970 (Laparoscopy, appendectomy) from APC 0130 to APC
0131. The APC Panel recommended that we make this change.

We are proposing to accept the APC
Panel ’ s recommendation to move CPT
code 44970 from APC 0130 to APC

0131.

6. Anal/Rectal Procedures

APC 0148: Level I Anal/Rectal

Procedure APC 0155: Level II Anal/Rectal
Procedure
APC 0149: Level III Anal/Rectal

Procedure
APC 0150: Level IV Anal/Rectal

Procedure We expressed concern to the APC Panel that APC 0148 appears to violate the 2 times rule. We suggested moving CPT code 46020 (Placement of seton) from APC 0148 to a higher level anal/ rectal procedure APC. The APC Panel
reviewed the four anal/rectal APCs (APC 0148, 0149, 0150, and 0155) and recommended moving CPT codes 46020 and 46706 (Repair of anal fistula with glue) from APC 0148 to APC 0150. The APC Panel also recommended moving CPT codes 45005 (Drainage of rectal abscess) and 45020 (Drainage of rectal abscess) from APC 0148 to APC 0155.

We are proposing to accept the APC
Panel ’ s recommendations specific to APC 0148. Our proposed movement of
CPT codes from APC 0148 to APCs 0150
and 0155 is shown in the Table 6 below.

7. Nerve Injections

APC 0204: Level I Nerve Injections APC 0206: Level II Nerve Injections APC 0207: Level III Nerve Injections APC 0203: Level IV Nerve Injections

We again expressed concern to the
APC Panel that APC 0203 and APC 0207 appear to violate the 2 times rule. We previously discussed this issue at the
APC Panel ’ s CY 2003 meeting. During the CY 2003 meeting, the APC Panel recommended that we gather additional data on procedures assigned to APC 0203 and APC 0207 before proposing to reconfigure them to attempt to eliminate
the 2 times rule violation. The APC Panel believed then that the structure of these two APCs as proposed in the August 2003 OPPS proposed rule were more clinically cohesive than those set
forth in the November 2002 OPPS final rule. During the February 2004 meeting, we presented other information for the APC Panel to review in making its
recommendation.

After careful consideration of the new data, the APC Panel recommended moving CPTs 64420 (Nerve block injection, intercostal nerve), 64630 (Injection treatment of nerve), 64640 (Injection treatment of nerve), and 62280 (Treatment of a spinal cord lesion) from APC 0207 to APC 0206. The APC Panel also recommended moving CPT code 62282 (Treatment of a spinal canal lesion) from APC 0207 to

APC 0203.

After reviewing more recent, complete calendar year data, we are proposing to accept some of the APC Panel ’ s recommendation (specifically, move
CPTs 64630 and 64640 from APC 0207 to APC 0206), and to make some other changes that we believe are appropriate to improve the nerve injection APC ’ s clinical and resource homogeneity. Our proposed nerve injection APC assignments are shown in Tables 7, 8,
and 9 below.


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8. Anterior Segment Eye Procedures

APC 0232: Level I Anterior Segment Eye

Procedures
APC 0233: Level II Anterior Segment

Eye Procedures We expressed concern to the APC Panel that APC 0233 appears to violate the 2 times rule. We suggested moving CPT codes 65286 (Repair of eye wound), 66030 (Injection treatment of eye), and 66625 (Removal of iris) from APC 0233 to APC 0232. The APC Panel agreed and recommended that we move CPT codes 65286, 66030, and 66625 from APC

0233 to APC 0232.

We are proposing to accept the APC
Panel ’ s recommendation and to reassign
these three codes as shown in Table 10.

9. Pathology

APC 0343: Level II Pathology APC 0344: Level III Pathology

We expressed concern to the APC Panel that APC 0343 appears to violate the 2 times rule. We suggested moving CPT code 88346 (Immunoflourescent study) from APC 0343 to APC 0344. The APC Panel concurred with our proposal.

We are proposing to accept the APC
Panel ’ s recommendation and to move
CPT code 88346 from APC 0343 to APC

0344.

10. Immunizations

APC 0355: Level III Immunizations

(proposed for CY 2005: Level I Immunizations) APC 0356: Level IV Immunizations (proposed for CY 2005: Level II Immunizations)
We expressed concern to the APC Panel that APCs 0355 and 0356 appear
to violate the 2 times rule. In order to eliminate this violation, we suggested moving CPT 90636 (Hepatitis A/ Hepatitis B vaccine, adult dose, intramuscular use) from APC 0355 to APC 0356. We also suggested moving CPT codes 90375 (Rabies immune globulin, intramuscular or subcutaneous), 90740 (Hepatitis B vaccine, dialysis or immunosuppressed patient, intramuscular), 90723 (Diphtheria-pertussis-tetanus, Hepatitis B, Polio vaccine, intramuscular), and 90693 (Typhoid vaccine, AKD, subcutaneous) from APC 0356 to APC

0355.

The APC Panel recommended moving
CPT 90636 from APC 0355 to APC 0356 and CPT codes 90740, 90723, and 90693
from APC 0356 to APC 0355. The APC Panel delayed making a
recommendation on CPT 90375 and requested that we collect additional cost data on this procedure for discussion at the next scheduled APC Panel meeting.

We are proposing to accept the APC
Panel ’ s recommended changes to move CPT code 90740 from APC 0356 to 0355,
and to move CPT code 90636 from 0355 to 0356. However, based on our review
of more recent claims data than were available to the APC Panel, we
determined that the medians for CPT


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codes 90693 and 90375 are below the $50 drug packaging threshold. Therefore, we are also proposing to package both CPT codes 90693 and 90375. We are proposing to change CPT code 90723 to status indicator ‘‘ e ’’ because it is not payable by Medicare.

11. Pulmonary Tests

APC 0367: Level I Pulmonary Tests APC 0368: Level II Pulmonary Tests APC 0369: Level III Pulmonary Tests

We expressed concern to the APC Panel that APC 0369 appears to violate the 2 times rule. We suggested moving CPT code 94015 (Patient recorded spirometry) from APC 0369 to APC
0367. The APC Panel concurred with our proposal.

We are proposing to accept the APC
Panel ’ s recommendation and to move
CPT code 94015 from APC 0369 to APC

0367. In addition, during our analysis of more recent claims data following the APC Panel meeting, we noted that APC
0367 violated the 2 times rules. Therefore, we are proposing to reassign CPT codes 94375, 94750, 94450, 94014, 94690, and 93740 to APC 0368.

12. Clinic Visits

APC 0600: Low Level Clinic Visits

We expressed concern to the APC Panel that APC 0600 appears to violate the 2 times rule. We suggested moving HCPS code G0264 (Assessment other than CHF, chest pain, asthma) to a higher level clinic visit. The APC Panel recommended that we not make any changes to APC 0600. We are proposing to accept this recommendation and not make any changes to APC 0600 for CY 2005.

D. Proposed Exceptions to the 2 Times
Rule

[If you choose to comment on issues in this section please indicate the caption

‘‘ 2 Times Rule ’’ at the beginning of your comment.]

As discussed earlier, the Secretary is authorized to make exceptions to the 2 times limit on the variation of costs within each APC group in unusual cases
such as low volume items and services.

Taking into account the APC changes that we are proposing for CY 2005 based
on the APC Panel recommendations
discussed in section II.C. of this preamble and the use of CY 2003 claims
data to calculate the median cost of procedures classified in the APCs, we
reviewed all the APCs to determine
which of them would not meet the 2


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times limit. We used the following criteria when deciding whether to propose exceptions to the 2 times rule
for affected APCs:

• Resource homogeneity

• Clinical homogeneity

• Hospital concentration

• Frequency of service (volume)

• Opportunity for upcoding and code

fragments. For a detailed discussion of these criteria, refer to the April 7, 2000 OPPS final rule with comment period (65 FR 18457).

Table 13 contains the APCs that we are proposing to exempt from the 2
times rule based on the criteria cited
above. In cases in which a
recommendation of the APC Panel appeared to result in or allow a violation of the 2 times rule, we generally accepted the APC Panel ’ s recommendation because these
recommendations were based on explicit consideration of resource use, clinical homogeneity, hospital specialization, and the quality of the
data used to determine the APC payment rates that we are proposing for CY 2005. The median cost for hospital outpatient services for these and all
other APCs can be found at web site: http//www.cms.hhs.gov.


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E. Coding for Stereotactic Radiosurgery

Services

[If you choose to comment on issues in this section please indicate the caption ‘‘ Stereotactic Radiosurgery ’’ at the beginning of your comment.] 1. Background

In the November 7, 2003 final rule with comment period (68 FR 63403), we
discussed the APC Panel ’ s consideration


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of HCPCS codes G0242 (Cobalt 60-based stereotactic radiosurgery plan) and G0243 (Cobalt 60-based stereotactic radiosurgery delivery). At its August 22, 2003 meeting, the APC Panel discussed combining the coding for these procedures under one code, with the payment for the new code derived by adding the payment for HCPCS codes G0242 and G0243 together. The APC
Panel recommended that we solicit additional input from professional societies representing neurosurgeons, radiation oncologists, and other experts in the field before recommending changes to the coding configuration for
Cobalt 60-based stereotactic radiosurgery planning and delivery.

In a correction to the November 7, 2003 final rule with comment period, issued on December 31, 2003 (68 FR 75442), we considered a commenter ’ s request to combine HCPCS codes G0242 and G0243 into a single procedure code in order to accurately capture the costs of this treatment in a single procedure claim because the majority of patients receive the planning and delivery of this treatment on the same day. We responded to the commenter ’ s request by explaining that several other
commenters stated that HCPCS code G0242 was being misused to code forthe planning phase of linear acceleratorbased stereotactic radiosurgery planning. Because the claims data for HCPCS code G0242 represent costs for
linear accelerator-based stereotactic radiosurgery planning (due to misuse of the code), in addition to Cobalt 60-based stereotactic radiosurgery planning, we
were uncertain as to how to combine
these data with HCPCS code G0243 to determine an accurate payment rate for a combined code for planning and delivery of Cobalt 60-based stereotactic radiosurgery.

In consideration of the misuse of HCPCS code G0242 and the potential for causing greater confusion by combining codes G0242 and G0243, we created aplanning code for linear acceleratorbased stereotactic radiosurgery (G0338) to distinguish this procedure from
Cobalt 60-based stereotactic radiosurgery planning. We maintained
both HCPCS codes G0242 and G0243 for the planning and delivery of Cobalt 60- based stereotactic radiosurgery treatment, consistent with the use of two G codes for planning (G0338) and delivery (G0173, G0251, G0339, G0340, as applicable) of each type of linear
accelerator-based treatment. We
indicated that we intend to maintain
these new codes in their current new technology APCs until the payment rates could be set using medians from this expanded set of codes. We also stated that we would solicit input from the APC Panel at its February 2004 meeting.

During the February 2004 APC Panel meeting, several presenters discussed
with the APC Panel their rationale for requesting that HCPCS codes G0242 and G0243 be combined into a single procedure code. One presenter explained that the request to combine
the codes was made because certain fiscal intermediaries were rejecting
claims in which HCPCS codes G0242 and G0243 were reported with a surgery revenue code. Although we have not issued any national instructions to fiscal intermediaries to deny claims for these services if they are billed with a surgery revenue code, the presenter stated that we may have indirectly led some fiscal
intermediaries to believe that Cobalt 60- based stereotactic radiosurgery should be reported with a radiation therapy revenue center because the procedure is separated into a planning code and a delivery code, which reflect the coding pattern of a radiation therapy procedure rather than a single code for a surgical procedure. The presenter stated that because of the way that CMS has coded this procedure, some fiscal
intermediaries have established local edits to deny claims in which HCPCS codes G0242 and G0243 are reported on a claim with a surgery revenue code.

The APC Panel recommended that CMS work with the presenters to determine if any fiscal intermediaries have established local edits to reject
claims in which HCPCS codes G0242 and G0243 are reported on a claim, and to determine specific reasons for any
such local edits. The APC Panel also recommended that CMS take necessary action to ensure that any such claims are not being denied payment due to local edits. The APC Panel did not agree that the solution to ensuring payment
was to combine HCPCS codes G0242 and G0243 into a single code, but rather
recommended that CMS educate fiscal intermediaries as to the appropriate procedures for submittal of these claims for Medicare payment.

In response to the concern expressed by several presenters that certain fiscal intermediaries were rejecting claims in
which HCPCS codes G0242 and G0243 were reported with a surgery revenue code, we have worked together with these presenters to identify specific fiscal intermediaries who may be rejecting these claims. However, to date, we have been unable to identify any
fiscal intermediaries who have established local edits that would reject
claims in which HCPCS codes G0242 and G0243 are reported with a surgery revenue code. If a provider should experience a rejection of such claims in
which HCPCS codes G0242 and G0243 are reported on a claim with a surgery revenue code, they should contact their fiscal intermediary to determine the specific reason for the claim rejection.

2. Proposal for CY 2005

For CY 2005, we are proposing to accept the APC Panel ’ s recommendation to work with the presenters to ensure
that claims in which HCPCS codes G0242 and G0243 are reported are not being unjustly denied payment due to local edits established by fiscal intermediaries. In the meantime, for CY 2005, we are proposing to maintain HCPCS code G0242 in new technology APC 1516 at a payment rate of $1,450,
and HCPCS code G0243 in new technology APC 1528 at a payment rate of $5,250. These payment rates are the
same as those established for CY 2004.

F. Proposed Movement of Procedures From New Technology APCs to Clinically Appropriate APCs
[If you choose to comment on issues in this section, please indicate the caption

‘‘ New Technology APCs ’’ at the beginning of your comment.]

1. Background

In the November 30, 2001 final rule (66 FR 59903), we made final our proposal to change the period of time during which a service may be paid under a new technology APC. The April 7, 2000 final rule initially established the timeframe that new technology APCs would be in effect (65 FR 18457). Beginning in CY 2002, we have retained services within new technology APC groups until we have acquired adequate data that allow us to assign the service to a clinically appropriate APC. This policy allows us to move a service from a new technology APC in less than 2 years if sufficient data are available, and
it also allows us to retain a service in a new technology APC for more than 3 years if sufficient data upon which to base a decision for reassignment have
not been collected.

In the November 7, 2003 final rule with comment period we implemented a comprehensive restructuring of the new technology APCs to make the payment levels more consistent (68 FR 63416). We established payment levels in $50, $100, and $500 intervals and expanded the number of new technology payment levels.

2. APC Panel Review and
Recommendation

During the APC Panel ’ s February 2004 meeting, the APC Panel heard testimony from several interested parties who


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requested specific modifications to the APCs for radiation oncology APC. They
asked the APC Panel to make several recommendations: (1) That we move CPT code 77418 (Intensity-modulated radiation therapy) from APC 0412 back into a new technology APC; (2) that we dampen, or limit, any possible payment reductions to APC 0301 (Level II Radiation Therapy); (3) that we accept more external data to evaluate costs; and (4) that we identify more claims that are useful for ratesetting.

In response to the testimony presented, the APC Panel recommended that we reassign CPT code 77418 to the new technology APC 1510 for CY 2005 and that we explain to providers any steps we take to limit payment reductions to APC 0301 so that they can better plan for future years during which we may decide not to apply a dampening, or payment reduction limitation, to the rates for APC 0301.

We are not proposing to accept the
APC Panel ’ s recommendations because we believe that we have ample claims data for use in determining an appropriate APC payment rate for CPT code 77418. Moreover, we believe that the development of median cost for CPT
code 77418 based on those data would be representative of hospital bills.

We have over 255,000 claims for this service, and over 95 percent were single claims that we could use for ratesetting. Moreover, the APC medians have been stable for the last 2 years of data. As indicated by our claims data, returning code 77418 to new technology APC 1510 would result in a payment for the service that is significantly higher than the resources utilized to provide it. 3. Proposal for CY 2005
There are 24 procedures currently assigned to new technology APCs for which we have data adequate to support assignment into clinical APCs. We are proposing to reassign these procedures to clinically appropriate APCs. We are proposing to assign 24 of the procedures to clinically appropriate APCs using CY
2003 claims data to set medians on which payments would be based. These APCs and the proposed assignments are displayed below in Table 14.

Based upon our review of the latest claims data available, we are proposing to move the procedures listed in Table 14 from their current new technology APCs to the APCs listed, as we have adequate data on these procedures to enable us to make the necessary APC assignment.

**BILLING CODE 4120**

**– 01** 

**– P** 


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We believe the payment rates in Table 14 for several of the procedures that we are proposing to move out of new technology APCs and into clinical APCs require further explanation for a fuller understanding.

For CPT code 96567, (Photodynamic therapy of the skin), the impact of the estimated payment decrease between CY 2004 and CY 2005 is actually low as the CY 2004 payment included the topically applied drug required to perform this procedure and the CY 2005 estimated payment does not. We now are proposing to pay separately for the drug billed under code J7308 in CY 2005. We have adequate claims data on which to base payment for that procedure in a clinically appropriate APC. Payment based on those data in addition to removal of the drug for separate payment resulted in a lower
median for the APC.

In the case of CPT code 33224, (Insertion of a left ventricular pacing lead and connection), based on a comparison of payment rates for CY 2004 and the estimated rate for CY 2005, it appears that there is a large increase in payment that results from reassigning the code from its new technology APC
to a clinical APC. The difference is due
to the fact that the estimated CY 2005 APC payment includes the cost of the
left ventricular lead that was not
included in the CY 2004 new technology APC payment. That leftventricular lead was paid as a passthrough device under code C1900 in CY2004, but is no longer eligible for passthrough payments in CY 2005, and, as such, is now included in the APC for the procedure. Similarly, the CY 2005 estimated payment for CPT code 33225, (Left ventricular pacing lead add-on),
includes the cost of the ventricular lead. However, for 33225, the data are still somewhat unstable. Therefore, we are proposing to maintain that procedure in a new technology APC, but at a higher payment level, reflecting the additional
cost of the lead.

We note that a number of positron emission tomography (PET) scans currently are classified into New Technology APC 1516. We recognize that PET is an important technology in many instances and want to ensure that the technology remains available to Medicare beneficiaries when medically necessary. We believe that we have sufficient data to assign PET scans to a clinically appropriate APC. We have been told, however, that if the effect of doing so is to reduce payment for the procedure, it may hinder access to this technology. Therefore, we are considering three options as the proposed payment for these procedures in CY 2005, based on our review of the
2003 claims data for the PET procedures, and we specifically invite comments on each of these options.

Option 1: Continue in CY 2005 the current assignment of the scans to New Technology APC 1516 prior to assigning
to a clinical APC.

Option 2: Assign the PET scans to a clinically appropriate APC priced according to the median cost of the
scans based on CY 2003 claims data. Under this option, we would assign PET scans to APC 0420, PET imaging.

Option 3: Transition assignment to a clinical APC in CY 2006 by setting payment in CY 2005 based on a 50

– 50 blend of the median cost and the CY 2004 New Technology. We would assign the scans to New Technology APC 1513 for a blended transition payment. The rates for these options are in addendum

B.

G. Proposed Changes to the Inpatient

List
[If you choose to comment on issues in this section, please indicate the caption

‘‘ Inpatient List ’’ at the beginning of your comment.]

We advised the APC Panel of a request that we had received to move four codes for percutaneous abscess drainage 44901(Drain append. abscess, percutaneous), 49021 (Drain abdominal abscess), 49041 (Drain percutaneous abdominal abscess), 49061(Drain, percutaneous, retroper. abscess)) from the inpatient list and to assign them to appropriate APCs. The APC Panel also
recommended that we evaluate other codes on the inpatient list for possible APC assignment and that we consider eliminating the inpatient list.

We are proposing to remove the four above-cited codes and assign them to clinically appropriate APCs, as recommended by the APC Panel. We are proposing to assign code 44901 to APC 0037, code 49021 to APC 0037; code 49041 to APC 0037; and code 49061 to
APC 0037. We discuss in section VII.E. of this preamble our response to the
APC Panel ’ s recommendation that we either abolish the inpatient list or evaluate it for any appropriate changes.

H. Proposed Assignment of ‘‘ Unlisted’’
HCPCS Codes
[If you choose to comment on issues in this section, please indicate the caption


### 50469 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

‘‘ Unlisted HCPCS Codes ’’ at the beginning of your comment.]

1. Background

Some HCPCS codes are used to report services that do not have descriptors
that define the exact service furnished. They are commonly called ‘‘ unlisted ’’ codes. The code descriptors often contain phrases such as: ‘‘ unlisted procedure ’’

, ‘‘ not otherwise classified, ’’

or ‘‘ not otherwise specified. ’’ The unlisted codes typically fall within a clinical or procedural category, but they lack the specificity needed to describe
the resources used in the service. For example, CPT code 17999 is defined as,

‘‘ Unlisted procedure, skin, mucous
membrane and subcutaneous tissue. ’’ The unlisted codes provide a way for providers to report services for which there is no HCPCS code that specifically
describes the service furnished. However, the lack of specificity in describing the service prevents us from assigning the code to an APC based on clinical homogeneity and median cost. In most cases, the unlisted codes are assigned to the lowest level, clinically appropriate APC under the Medicare
OPPS. This creates an incentive for providers to select the appropriate, specific HCPCS code to describe the
service where one is available. In addition, if there is no HCPCS code that accurately describes the service, placing
the unlisted code in the lowest level APC provides an incentive for interested parties to secure a code through the

AMA ’ s CPT process that will describe the service. Once a code that accurately describes the service is created, we can collect data on the service and place it
in the correct APC based on the clinical
nature of the service and its median

cost.

We do not use the median cost for the
unlisted codes in the establishment of the weight for the APC to which the code is assigned because, by definition of the code, we do not know what
service or combination of services is reflected in the claims billed using the
unlisted code. Our review of HCPCS code assignments to APCs has revealed that
there are a number of unlisted codes that are not assigned to the lowest level

APC.

2. Proposal for CY 2005

We are proposing to reassign these
unlisted codes for CY 2005 OPPS to the
lowest level APC in the clinical grouping in which the unlisted code is located. The list of those codes, the current APC assignment, and the assignment we propose for CY 2005 OPPS are displayed in Table 15.

We continue to believe that assigning
unlisted codes to the lowest level of the APC for the clinical or procedural grouping into which the code falls creates an appropriate incentive for providers to pursue assignment of new codes where they are needed. Moreover, payment at the lowest level of APC for the clinical or procedural grouping allows for some payment for the
services furnished and also ensures that we do not pay inappropriately for services that are unspecified.


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I. Proposed Addition of New Procedure
Codes

During the first two quarters of CY 2004, we created 85 HCPCS codes that were not addressed in the November 7, 2003 final rule that updated the CY 2004 OPPS. We have designated the payment status of those codes, which are shown in Table 16 below, and added them to the April and July updates of the 2004 OPPS (Transmittals 3144, 3154, 3322, and 3324). Thirty of the new codes were created to enable providers to bill for brand name drugs and to receive payments at a rate that differs from that for generic equivalents, as
mandated in new section 1833(t)(14)(A)(i) of the Act as added by Pub. L. 108

– 173. In this proposed rule, we are soliciting comment on the APC assignment of these services. Further,
consistent with our annual APC updating policy, we are proposing to assign the new HCPCS codes for CY 2005 to the appropriate APCs and would incorporate them into our final
rule for CY 2005.


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J. Proposed OPPS Changes: Provisions of MMA (Pub. L. 108

– 173)

1. Payment for Initial Preventive Physical Examinations (Section 611 of
Pub. L. 108

– 173)

[If you choose to comment on issues in this section, please indicate the caption

‘‘ Physical Examinations ’’ at the beginning of your comment.]

a. Background

Section 611 of Pub. 108

– 173 provides for coverage under Medicare Part B of an initial preventive physical examination for new beneficiaries,
effective for services furnished on or after January 1, 2005. This provision applies to beneficiaries whose coverage period under Medicare Part B begins on or after January 1, 2005, and only for an initial preventive physical examination performed within 6 months of the beneficiary ’ s initial coverage date.

Current Medicare coverage policy does not allow for payment for routine physical examinations (or checkups)
that are furnished to beneficiaries.
Before the enactment of Pub. L. 108

– 173, all preventive physical
examinations had been excluded from coverage based on section 1862(a)(7) of the Act, which states that routine physical checkups are excluded services. This exclusion is specified in regulations under § 411.15(a). In addition, preventive physical
examinations had been excluded from coverage based on section 1862(a)(1)(A)
of the Act. This section of the Act provides that items and services must be reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member (as implemented in regulations under § 411.15(k)).

Coverage of initial preventive physical examinations is provided only under Medicare Part B. As provided in the statute, this new coverage allows payment for one initial preventive physical examination within the first 6 months after the beneficiary ’ s first Part B coverage begins, although that coverage period may not begin before January 1, 2005. We also note that Pub.

L. 108

– 173 did not make any provision
for the waiver of the Medicare
coinsurance and Part B deductible for the initial preventive physical examination. Payment for this service would be applied to the required Medicare Part B deductible, which is $110 for CY 2005, if the deductible has not been met, and the usual coinsurance provisions would apply. b. Proposed Amendments to Regulations
We are proposing to amend our regulations to add a new § 410.16 that would provide for coverage of initial preventive physical examinations in various settings, including the hospital outpatient department, as specified in the statute, and specify the condition for coverage and limitation on coverage. In addition, we are proposing to conform our regulations on exclusions from coverage under § 411.15(a)(1) and § 411.15(k) to the provisions of section
611 of Pub. L. 108

– 173. Specifically, we are proposing to specify an exception to the list of examples of routine physical checkups that are excluded from coverage under § 411.15(a) and to add a
new exclusion under § 411.15(k)(11).

We are proposing to amend § 419.21 of the OPPS regulations to add a new paragraph (e) to specify payment for an initial preventive physical examination
as a Medicare Part B covered service
under the OPPS if the examination is
furnished within the first 6 months of the beneficiary ’ s first Medicare Part B

coverage.

We note that the initial preventive physical examination is also addressed in detail in our proposed rule to update the Medicare Physician ’ s Fee Schedule for CY 2005. However, because we
believe the same elements of the initial physical examination furnished in a physician ’ s office would also apply when the examination is performed in a hospital outpatient clinic, we are proposing to revise the applicable regulations to reflect this requirement.

Section of 611(b) of Pub. L. 1089

– 173 define an ‘‘ initial preventive physical

examination ’’ to mean physicians ’’ services consisting of

— (1) A physical examination (including measurement of height, weight, blood pressure, and an electrocardiogram, but excluding clinical laboratory tests) with the goal of health promotion and disease detection; and

(2) Education, counseling, and referral with respect to screening and other preventive coverage benefits separately authorized under Medicare Part B, excluding clinical lab tests.

Specifically, section 611(b) of Pub. L.

108

– 173 provides that the education, counseling, and referral services with respect to the screening and other preventive services authorized under Medicare Part B include the following:

(1) Pneumococcal, influenza, and hepatitis B vaccine and their administration;

(2) Screening mammography; (3) Screening pap smear and screening pap smear and screening pelvic examination; (4) Prostate cancer screening tests; (5) Colorectal cancer screening tests;(6) Diabetes outpatient selfmanagement training services;

(7) Bone mass measurements; (8) Screening for glaucoma; (9) Medical nutrition therapy services
for individuals with diabetes and renal disease;

(10) Cardiovascular screening blood tests; and

(11) Diabetes screening tests. Section 611(d)(2) of Pub. L 108

– 173 amended section 1861(s)(2)(K)(i) and (ii) of the Act to specify the services identified as physicians ’ services and
referred to in the definition of initial preventive physical examination include services furnished by a physician assistant, a nurse practitioner, or a clinical nurse specialist. We refer to these professionals as ‘‘ qualified nonphysician practitioners. ’’

Based on the language of the statute, our review of the medical literature, current clinical practice guidelines, and
United States Preventive Services Task Force recommendations, we are proposing (under proposed new § 410.16(a), Definitions) to interpret the

term ‘‘ initial preventive physical

examination ’’ for purposes of this new benefit to include all of the following services furnished by a doctor of medicine or osteopathy or a qualified nonphysician practitioner:

(1) Review of the individual ’ s comprehensive medical and social history. We are proposing to define

‘‘ medical history ’’ to include, as a minimum, past medical and surgical history, including experience with illnesses, hospital stays, operations, allergies, injuries, and treatments; current medications and supplements, including calcium and vitamins; and family history, including a review of medical events in the patient ’ s family, including diseases that may be hereditary or place the individual at risk. We are proposing to define ‘‘ social history ’’ to include, at a minimum, history of alcohol, tobacco, and illicit drug use; work and travel history; diet; social activities; and physical activities.

(2) Review of the individual ’ s potential (risk factors) for depression (including past experiences with depression or other mood disorders) based on the use of an appropriate screening instrument that the physician or other qualified nonphysician practitioner may select from various available standardized screening tests for this purpose, unless the appropriate screening instrument is defined through the national coverage determination (NCD) process.


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(3) Review of the individual ’ s functional ability and level of safety (that is, at a minimum, a review of the following areas: hearing impairment, activities of daily living, falls risk, and home safety), based on the use of an appropriate screening instrument, which the physician or other qualified nonphysician practitioner may select
from various available standardized screening tests for this purpose, unless the appropriate screening instrument is further defined through the NCD

process.

(4) An examination to include
measurement of the individual ’ s height, weight, blood pressure, a visual acuity screen, and other factors as deemed appropriate, based on the individual ’ s comprehensive medical and social history and current clinical standards.

(5) Performance of an electrocardiogram and interpretation.

(6) Education, counseling, and referral, as deemed appropriate, based on the results of elements (1) through (5) of the proposed definition of the initial preventive physical examination.

(7) Education, counseling, and referral, including a written plan for obtaining the appropriate screening and other preventive services, which are also covered as separate Medicare Part B benefits; that is, pnuemococcal, influenza, and hepatitis B vaccines and their administration, screening mammography, screening pap smear and screening pelvic exams, prostate cancer screening tests, diabetes outpatient self-management training services, bone mass measurements, screening for glaucoma, medical nutrition therapy services, cardiovascular screening blood tests, and diabetes screening tests.

In view of the possibility that it may be appropriate to include other (or revised) elements in the definition of
the term ‘‘ initial preventive physical examination, ’’ we are requesting public comments on this issue. For example,
we have chosen not to define the term

‘‘ appropriate screening instrument ’’ for screening individuals for depression, alcohol, tobacco and illicit drug use, functional ability, and level of safety because we anticipate that the examining physician or qualified nonphysician practitioner would want to use the test of his or her choice, based on current clinical practice guidelines. We believe that any standardized screening test for depression, substance abuse, functional ability, and level of safety recognized by the American Academy of Family Physicians, theAmerican College of PhysiciansAmerican Society of Internal Medical, the American College of Preventive Medicine, the American Geriatrics Society, the American Psychiatric Association, and the United States
Preventive Services Task Force would be acceptable for purposes of meeting
the ‘‘ appropriate screening instrument ’’ provision.

To facilitate our future consideration of defining more specifically the type or types of appropriate screening instruments for depression, substance abuse, functional ability, or level of safety, we are proposing to include provisions in paragraphs (2) and (3) under the proposed definition of initial preventive physical examination that would allow us to do this through the NCD process. This proposed approach
would allow us to conduct a more timely assessment of new types of screening tests than would be possible under the standard rulemaking process. We intend to use the NCD process, if necessary, for evaluating appropriate new screening tests for depression; alcohol, tobacco and illicit drug use; functional ability; or level of safety. This NCD process includes an opportunity for public comment in order to evaluate
the medical and scientific issues related to the coverage of the new tests that may be brought to our attention in the future.

c. Proposed Assignment of New HCPCS Code for Payment of Initial Preventive Physical Examinations

There is no current CPT code that contains the specific elements included in the initial preventive physical examination. Therefore, we are proposing to establish the following new HCPCS code, GXXXX, Initial preventive physical examination, to be
used to bill for the new service under both the Medicare physician fee schedule and the OPPS. As required by the statute, this code includes an electrocardiogram, but does not include the other previously mentioned preventive services that are currently separately covered and paid under the Medicare Part B screening benefits. When these other preventive services are performed, they should be identified using the existing appropriate codes.

For payment under the physician fee schedule, relative value units are being proposed for new HCPCS code GXXXX based on equivalent resources and work intensity to those contained in CPT E/ M code 99203 (new patient, office or other outpatient visit) and CPT 93000 (electrocardiogram, complete). The

‘‘ technical component ’’ is the portion of the physician fee schedule that is most comparable to what Medicare pays under the OPPS, the costs other than the physician professional services that are billed and paid for separately under the fee schedule, not OPPS. The estimated technical component of the physician fee schedule is between $50 and $100.

Given our lack of cost data to guide assignment of the new benefit into a clinically appropriate APC, we are proposing to assign GXXXX to the new technology APC 1539 that has a payment level of $50 to $100. Temporary assignment to a new technology APC allows us to pay for the new benefit provided in the OPD while we accrue claims data and experience on which to base a clinically relevant APC assignment.

d. Handling of Comments Received in Response to This Proposal

We will respond to all comments regarding the proposed elements required for the initial preventive physical examination, whether the examination is performed in a physician ’ s office or clinic or in a hospital clinic, in the final rule implementing the Medicare Physician
Fee Schedule for CY 2005. We will respond to comments regarding payment for the examination under the OPPS in the subsequent final rule implementing the OPPS payment rates
for CY 2005.

2. Payment for Certain Mammography Services (Section 614 of Pub. L. 108

– 173)

[If you choose to comment on issues in this section, please indicate the caption

‘‘ Mammography ’’ at the beginning of your comment.]

Section 614 of Pub. L. 108

– 173 amended section 1833(t)(1)(B)(iv) of the Act to provide that screening mammography and diagnostic mammography services are excluded from payment under the OPPS. This amendment applies to screening mammography services furnished on or after December 8, 2003 (the date of the
enactment of Pub. L. 108

– 173), and in the case of diagnostic mammography, to services furnished on or after January 1, 2005. As a result of this amendment, both screening mammography and diagnostic mammography will be paid under the physician fee schedule.

We are proposing to amend § 419.22 of the regulations by adding a new paragraph(s) to specify that both screening mammography and diagnostic mammography will be excluded from payment under the OPPS, in accordance
with section 614 of Pub. L. 108

– 173.
III. Proposed Recalibration of APC Relative Weights for CY 2005

[If you choose to comment on issues in this section, please include the caption


### 50474 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

‘‘ APC Relative Weights ’’ at the beginning of your comment.]

A. Database Construction

Section 1833(t)(9)(A) of the Act requires that the Secretary review and revise the relative payment weights for APCs at least annually, beginning in CY 2001 for application in CY 2002. In the April 7, 2000 final rule (65 FR 18482), we explained in detail how we calculated the relative payment weights that were implemented on August 1, 2000 for each APC group. Except for some reweighting due to APC changes, these relative weights continued to be in effect for CY 2001. (See the November 13, 2000 interim final rule (65 FR 67824 through 67827).)

To recalibrate the relative APC weights for services furnished on or after January 1, 2005, and before January 1, 2006, we are proposing to use the same basic methodology that we described in the April 7, 2000 final rule. That is, we would recalibrate the weights based on claims and cost report data for outpatient services. We are proposing to use the most recent
available data to construct the database for calculating APC group weights. For the purpose of recalibrating APC relative weights for CY 2005, the most
recent available claims data are the approximately 119 million final action claims for hospital OPD services furnished on or after January 1, 2003, and before January 1, 2004.

Of the 119 million final action claims for OPPS services, 96.7 million claims were of the type of bill potentially appropriate for use in setting rates for OPPS services (but did not necessarily contain services payable under OPPS). Of the 96.7 million claims, we were able to use 48.5 million whole claims (from which we created 75 million single procedure claim records) to set OPPS proposed for CY 2005 weights.

The proposed weights and payments in Addenda A and B to this proposed rule were calculated using claims from this period that had been processed before January 1, 2004. We selected claims for services paid under the OPPS
and matched these claims to the most recent cost report filed by the individual hospitals represented in our claims data. We are proposing that the APC relative weights for CY 2005 under the OPPS
would continue to be based on the median hospital costs for services in the APC groups. For the final rule, we are proposing to base median costs on
claims for services furnished in CY 2003 and processed before June 30, 2004. 1. Proposed Treatment of Multiple
Procedure Claims

For CY 2005, we are proposing to continue to use single procedure claims to set the medians on which the weights would be based. We have received many requests that we ensure that the data from claims that contain charges for multiple procedures are included in the
data from which we calculate the CY 2005 relative payment weights. Requesters believe that relying solely on single procedure claims to recalibrate APC weights fails to take into account data for many frequently performed procedures, particularly those commonly performed in combination with other procedures. They believe that, by depending upon single procedure claims, we base payment weights on the least costly services, thereby introducing downward bias to the medians on which the weights are
based.

We agree that, optimally, it is desirable to use the data from as many claims as possible to recalibrate the relative payment weights, including those with multiple procedures. As discussed in the explanation of single procedure claims below, we have used
the date of service on the claims and a list of codes to be bypassed to create

‘‘ pseudo ’’ single claims from multiple procedure claims. We refer to these newly created single procedure claims

as ‘‘ pseudo ’’ singles because they were submitted by providers as multiple procedure claims.

2. Proposed Use of Single Procedure
Claims

We use single procedure claims to set
the median costs for APCs because we are, so far, unable to ensure that packaged costs can be correctly allocated across multiple procedures performed on the same date of service. However, bypassing specified codes that we believe do not have significant packaged costs enables use of more data from multiple procedure claims. For CY 2003, we created ‘‘ pseudo ’’ single claims by bypassing HCPCS codes 93005 (Electrocardiogram, tracing), 71010 (Chest x-ray), and 71020 (Chest x-ray) on a submitted claim. However, we did not use claims data for the bypassed
codes in the creation of the median
costs for the APCs to which these three codes were assigned because the level of packaging that would have remained on the claim after we selected the bypass code was not apparent and therefore, it
was difficult to determine if the
medians for these codes would be

correct. For CY 2004, we created ‘‘ pseudo ’’ single claims by bypassing these three codes and also by bypassing an
additional 269 HCPCS codes in APCs. These codes were selected by CMS
based on a clinical review of the services and because it was presumed that these codes had only very limited packaging and could appropriately be bypassed for the purpose of creating

‘‘ pseudo ’’ single claims. The APCs to which these codes were assigned were varied and included mammography, cardiac rehabilitation, and level I plain film x-rays. To derive more ‘‘ pseudo ’’ single claims, we also broke claims apart where there were dates of service for revenue code charges on that claim that could be matched to a single procedure code on the claim on the
same date.

As in CY 2003, we did not include the claims data for the bypassed codes in
the creation of the APCs to which the 269 codes were assigned because, again,
we had not established that such an approach was appropriate and would aid in accurately estimating the median cost for that APC. For CY 2004, from
about 16.3 million otherwise unusable claims, we were able to use about 9.5 million multiple procedure claims to
create about 27 million ‘‘ pseudo ’’ single claims. For CY 2005, from about 21 million otherwise unusable claims, we
were able to use about 18 million multiple procedure claims to create
about 45.5 million ‘‘ pseudo ’’ single
claims.

For CY 2005, we are proposing to continue using date of service matching
as a tool for creation of ‘‘ pseudo ’’ single claims and also to take a more empirical approach to creating the list of codes that we would bypass to create

‘‘ pseudo ’’ single claims. The process we are proposing for CY 2005 OPPS results in our being able to use some part of 93 percent of the total claims eligible for use in OPPS ratesetting and modeling. In CY 2004, we were able to use some part of the data from 82 percent of eligible claims. This process enabled us to use 75 million single bills for ratesetting: 45.5 million ‘‘ pseudo ’’ singles and 30.5 million ‘‘ natural ’’ single
bills.

We are proposing to bypass the 383
codes identified in Table 17 to createnew single claims and to use the lineitem costs associated with the bypass
codes on these claims in the creation of
the median costs for the APCs into which they are assigned. Of the codes on this list, only 123 (32 percent) were used for bypass in CY 2004.

We developed the proposed bypass list using four criteria:


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a. We developed the following empirical standards by reviewing the frequency and magnitude of packaging in the single claims for payable codes other than drugs and biologicals. We assumed that the representation of packaging on the single claims for any given code is comparable to packaging for that code in the multiple claims.

• There were 100 or more single
claims for the code. This ensured that observed outcomes were sufficiently representative of packaging that might occur in the multiple claims.

• Five percent or fewer of the single claims for the code had packaged costs on that single claim for the code. This criterion results in limiting the amount of packaging being redistributed to the payable procedure remaining on the claim after the bypass code is removed
and ensures that the costs associated with the bypass code represent the cost of the bypassed service. For the remaining payable codes, the average percentage of single claims with any packaged costs was 70 percent, and the chosen threshold of 5 percent fell at roughly the 15th percentile.

• The median cost of packaging observed in the single claim was equal to or less than $50. This limits the
amount of error in redistributed costs.

• The code is not a code for an
unlisted service.

b. We examined APCs relying on a low volume of single claims, and it became apparent that several radiological supervision and interpretation codes were commonly billed with the procedural codes in the APCs. We then reviewed all radiological supervision and interpretation codes to assess their viability as bypass codes.
For the codes included on the list in Table 17, we determined that, generally, the packaging on claims, including these radiological supervision and interpretation codes, should be associated with the procedure performed.

c. We examined radiation planning and related codes provided by a professional organization. In the organization ’ s opinion, the codes could safely be bypassed and used without packaging to set medians for the APCs into which these codes are assigned. Many of the codes the organization
recommended met our criterion under item a., and the remaining codes were close. Therefore, after reviewing such codes, we are proposing to adopt as bypass codes all radiation planning and related codes as provided by the organization.

d. We included HCPCS codes 93005
and 71010. These codes have been bypassed for the past 3 years and generate a significant amount of new single claims because they are very commonly done on the same date of surgery. They have low median packaged costs and a low percentage of single claims with any packaged costs, 6 percent and 18 percent, respectively.

We invite public comment on the

‘‘ pseudo ’’ single process, including the bypass list and the criteria.

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However, we note several inherent features of multiple bill claims that prevented us from the further creation
of ‘‘ pseudo ’’ singles. We discussed these obstacles in detail in the August 9, 2002 proposed rule (67 FR 52092, 52108 through 52111) and the November 1, 2001 final rule (66 FR 66718 and 66743 through 66746).

Notwithstanding the obstacles in creating additional ‘‘ pseudo ’’ single claims, we have received a number of suggestions from outside sources providing options to this approach. Some of the suggestions involved complex methodologies driven by lengthy tables of codes and complex logic that focused on creating ‘‘ pseudo ’’ singles by packaging specific packaged HCPCS codes with specific payable HCPCS codes. While we appreciate the time and attention spent by various parties interested in this issue, our review of the suggestions and our empirical analysis of the most specific and detailed recommendation using the data used to develop the APC relative weights for the APC Panel ’ s February2004 meeting indicated that codespecific packaging would add a significant amount of time and complexity to the ratesetting process and would require involved annual maintenance to accurately update the code sets used in the suggested methodology each year. Moreover, we would experience only a modest

increase in ‘‘ pseudo ’’ single claims.

Further, code-specific packaging does not appear to appreciably increase the volume of single bills available for calculating medians for those APCs that are currently derived from a small
volume of total claims. We believe that the observed modest improvements in
the ‘‘ pseudo ’’ single claims volume from code-specific packaging can be attributed to the number and variety of services billed on multiple procedure claims, which often have complex
HCPCS code combinations. These complex claims cannot be reduced to single bills by packaging the costs for a few procedures. In light of these findings, we are not proposing to adopt any code-specific packaging proposals. However, we would review and consider any other specific proposals
that we received as comments.

Other suggestions included
recommendations that the costs in packaged revenue codes and packaged HCPCS codes be allocated separately to paid HCPCS codes based on the prior

year ’ s payment weights or payment rates for the single procedures. Still other suggestions recommended that we allocate the packaged costs in proportion to the charges or to the costs for the major procedures based on the
current year ’ s claims. We are concerned that using a prior year ’ s median costs, relative weights or payment rates as the basis to allocate current year ’ s packaged costs to current year costs for payable HCPCS codes may not be appropriate. For example, if two procedures are performed and one uses an expensive device, this methodology would split
the costs of the device between the
service that uses the device and a service that does not use the device, thus resulting in incorrect allocation of the packaged costs. Therefore, we are not proposing to incorporate these suggestions in our ratesetting methodology but we intend to examine them more thoroughly.

We continue to seek strategies that would enable us to use more multiple procedure claims and continue to explore whether there are techniques
that could result in medians that are more representative of the relative cost of the services being furnished. However, at this time, we are not proposing a methodology beyond use of dates of service and the expanded bypass list. We solicit specific proposals provided in comments on how multiple procedure claims can be better used in calculating the relative payment weights. B. Proposed Calculation of Median Costs for CY 2005

In this section of the preamble, we
discuss the use of claims to calculate the proposed OPPS payment rates for CY 2005. (See the hospital outpatient prospective payment page on the CMS website on which this proposed rule is posted for an accounting of claims used in the development of the proposed

rates: www.cms.hhs.gov/hopps .) The accounting of claims used in the development of the proposed rule is included under supplemental materials for this proposed rule. That accounting provides additional detail regarding the number of claims derived at each stage of the process. In addition, we note that
below we discuss the files of claims that comprise the data sets that are available for purchase under a CMS data user

contract. See www.cms.hhs.gov/ providers/hopps for information about purchasing the following two OPPS data
files: ‘‘ OPPS limited data set ’’ and

‘‘ OPPS identifiable data set ’’

.

We are proposing to use the following methodology to establish the weights to be used to set payment rates for CY

2005:

We are proposing to use outpatient claims for full CY 2003 to set the weights for CY 2005. To begin the calculation of the weights for this proposed rule for CY 2005, we pulled all claims for outpatient services
furnished in CY 2003 from the national claims history file. This is not the population of claims paid under the OPPS, but all outpatient claims (for example, ambulatory surgical center (ASC) claims reported on bill type 83, critical access hospital (CAH) claims, and hospital claims for clinical laboratory services for persons who are neither inpatients nor outpatients of the hospital).

We then excluded claims with condition code 04, 20, 21, 77. These are claims that providers submitted to Medicare knowing that no payment will be made. For example, providers submit
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an official denial notice from Medicare
and document that a service is not
covered. We then excluded claims for services furnished in Maryland, Guam, and the U.S. Virgin Islands because hospitals in those geographic areas are not paid under the OPPS.

We divided the remaining claims into three groups shown below. Groups 2 and 3 comprise the 96.7 million claims that contain hospital bill types paid
under the OPPS.

1. Claims that were not bill types 12X, 13X, 14X (hospital bill types) or 76X (CMHC bill types). Other bill types, such as ASCs, bill type 83, are not paid under the OPPS and, therefore, these
claims were not used to set OPPS payment.

2. Bill types 12X, 13X, or 14X (hospital bill types). These claims are hospital outpatient claims.

3. Bill type 76X (CMHC). (These claims are later combined with any
claims in item 2 above with a condition code 41 to set the per diem partial hospitalization rate determined through a separate process.)

In previous years, we have begun the CCR calculation process using the most recent available cost reports for all hospitals irrespective of whether any or all of the hospitals included actually filed hospital outpatient claims for the data period. However, for this proposed rule, we first limited the population of cost reports to only those for hospitals that filed outpatient claims in CY 2003 before determining whether the CCRs for such hospitals were valid. This initial limitation changed the distribution of CCRs used during the trimming process discussed below.

We then calculated the cost-to-charge ratios (CCRs) at a departmental level and overall for each hospital for which we had claims data. We did this using hospital specific data from the Hospital Cost Report Information System (HCRIS). We used the most recent available cost report data, in most cases, cost reports for CY 2001 or CY 2002. We
used the most recent available cost report, whether submitted or settled. If the most recent available cost report was submitted but not settled, we looked at the last settled cost report to determine
the ratio of submitted to settled cost and we then adjusted the most recent
available submitted but not settled cost report using that ratio. We are proposing
to use these same CCRs ratios for the
final rule.

We then flagged CAHs, which are not paid under the OPPS, and hospitals
with invalid CCRs. These included claims from hospitals without a CCR, for hospitals paid an all-inclusive rate, for hospitals with obviously erroneous CCRs (greater than 90 or less than .0001), and for hospitals with CCRs that were identified as outliers (3 standard deviations from the geometric mean after removing error CCRs). In addition,
we trimmed the CCRs at the departmental level by removing the
CCRs for each cost center as outliers if they exceeded ± 3 standard deviations of the geometric mean. We are proposing
to use these trimmed CCRs for the final rule. In prior years, we did not trim CCRs at the departmental level. However, for CY 2005, we are proposing to trim at the departmental CCR level to eliminate aberrant CCRs that, if found in high volume hospitals, could skew the
medians. We used a four-tiered hierarchy of cost center CCRs to match
a cost center to a revenue code with the top tier being the most common cost center and the last tier being the default CCR. If a hospital ’ s departmental CCR was deleted by trimming, we set the departmental CCR for that cost center to

‘‘ missing, ’’ so that another departmental CCR in the revenue center hierarchy could apply. If no other departmental CCR could apply to the revenue code on the claim, we used the hospital ’ s overall CCR for the revenue code in question.

We then converted the charges on the claim by applying the CCR that we
believed was best suited to the revenue
code indicated on the line with the charge. See Table 18 for the allowed
revenue codes. Revenue codes not on
this list are those not allowed under the
OPPS because their services cannot be paid under the OPPS (for example, inpatient room and board charges) and, thus, charges with those revenue codes were not packaged for creation of the OPPS median costs. If a hospital did not have a CCR that was appropriate to the revenue code reported for a line item charge (for example, a visit reported
under the clinic revenue code but the hospital did not have a clinic cost center), we applied the hospital-specific overall CCR, except as discussed in section V.H. of this proposed rule for
calculation of costs for blood.

Thus, we applied CCRs as described above to claims with bill types 12X, 13X, or 14X, excluding all claims from CAHs and hospitals in Maryland, Guam, or the U.S. Virgin Islands, and flagged hospitals with invalid CCRs. We excluded claims from all hospitals for which CCRs were flagged as invalid.

We identified claims with condition code 41 as partial hospitalization
services of CMHCs and removed them to
another file. These claims were
combined with the 76X claims identified previously to calculate the partial hospitalization per diem rate. We then excluded claims without a
HCPCS code. We also removed claims
for observation services to another file.
We removed to another file claims that contain nothing but flu and pneumococcal pneumonia (virus) ( ‘‘ PPV ’’ ) vaccine. Influenza and PPV vaccines are paid at reasonable cost and, therefore, these claims are not used to
set OPPS rates. We note that the two above mentioned separate files containing partial hospitalization claims
and the observation services claims are
included in the files that are available for purchase as discussed above.

We next copied line item costs for drugs, blood, and devices (the lines stay on the claim but are copied off onto another file) to a separate file. No claims were deleted when we copied these
lines onto another file. These line-items are used to calculate the per unit median for drugs, radiopharmaceuticals,and blood and blood products. The lineitem costs were also used to calculate the per administration cost of drugs, radiopharmaceuticals, and biologicals (other than blood and blood products) for purposes of determining whether the cost of the item would be packaged or be paid separately. Section 1833(t)(16)(B) of the Act, as added by section 621(a)(2) of Pub. L. 108

– 173, requires the Secretary to lower to $50 the threshold for separate payment of drugs and biologicals and the per administration cost derived using these
line-item cost data would be used to
make that decision for CY 2005. As discussed in our November 7, 2003 final rule with comment period (68 FR 63398), we had also applied a $50 threshold for the CY 2004 update to the

OPPS.

We then divided the remaining claims into five groups.

1. Single Major Claims: Claims with a single separately payable procedure, all
of which would be used in median setting.

2. Multiple Major Claims: Claims with more than one separately payable procedure or multiple units for one payable procedure. As discussed below,
some of these can be used in median setting.

3. Single Minor Claims: Claims with a single HCPCS code that is not separately payable. These claims may have a single packaged procedure or a drug code.

4. Multiple Minor Claims: Claims with multiple HCPCS codes that are not separately payable without examining dates of service. (For example, pathology codes are packaged unless they appear on a single bill by themselves. The multiple minor file has claims with multiple occurrences of pathology codes, with packaged costs


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that cannot be appropriately allocated across the multiple pathology codes. However, by matching dates of service for the code and the reported costs through the ‘‘ pseudo ’’ single creation process discussed earlier, a claim with multiple pathology codes may become
several ‘‘ pseudo ’’ single claims with a unique pathology code and its associated costs on each day. These

‘‘ pseudo ’’ singles for the pathology
codes would then be considered a separately payable code and would be used like claims in the single major
claim file.

5. Non-OPPS Claims: Claims that contain no services payable under the
OPPS are excluded from the files used
for the OPPS. Non-OPPS claims have codes paid under other fee schedules, for example, DME or clinical laboratory.

We note that the claims listed in numbers 1 through 4 above are included in the data files that can be purchased
as described above.

We set aside the single minor claims and the non-OPPS claims (numbers 3 and 5 above) because we did not use either in calculating median cost.

We then examined the multiple major and multiple minor claims (numbers 2 and 4 above) to determine if we could convert any of them to single major claims using the process described previously. We first grouped items on the claims by date of service. If each major procedure on the claim had a
different date of service and if the line items for packaged HCPCS and packaged revenue codes had dates of service, we broke the claim into multiple ‘‘ pseudo ’’ single claims based
on the date of service.

After those single claims were created, we used a list of ‘‘ bypass codes ’’ to remove separately payable procedures that are thought to contain limited costs or no packaged costs from a multiple procedure bill. A discussion of the creation of the list of bypass codes
used for the creation of ‘‘ pseudo ’’ single
claims is contained in section III.A.2. of this preamble and the list of codes is provided in Table 17. We excluded those claims that we were not able to convert to singles even after applying both of the techniques for
creation of ‘‘ pseudo ’’ singles. We then packaged the costs of packaged HCPCS (codes with status indicator ‘‘ N ’’ on Addendum B to this proposed rule) and packaged revenue codes (listed in Table 18) into the cost of the single major procedure remaining on the claim.

After removing claims for hospitals with error CCRs, claims without HCPCS codes, claims for immunizations not covered under the OPPS, and claims for services not paid under the OPPS, 52.2
millions claims were left. This subset of claims is roughly one-half of the 96.7 million claims for bill types paid under the OPPS. Of these 52.2 million claims, we were able to use some portion of 48.5 million (93 percent) whole claims to create the 75 million single and

‘‘ pseudo ’’ single claims for use in our CY 2005 median payment ratesetting.

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We also excluded claims that either had zero costs after summing all costs
on the claim or for which CMS lacked an appropriate provider wage index. For the remaining claims, we then wage adjusted 60 percent of the cost of the claim (which we determined to be the labor-related portion), as has been our policy since initial implementation of


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the OPPS, to adjust for geographic
variation in labor-related costs. We made this adjustment by determining the wage index that applied to the hospital that furnished the service and dividing the cost for the separately paid HCPCS code furnished by the hospitalby that wage index. We used the prereclassified wage index proposed for IPPS published in the hospital IPPS proposed rule on May 18, 2004 (69 FR 28196), and corrected in the IPPS correction notice published on June 25, 2004 (69 FR 35919). These wage indices are reprinted in Addenda L and M to this proposed rule. We are proposing to use the pre-reclassified wage index for
standardization because we believe that
it better reflects the true costs of items
and services in the area in which thehospital is located than the postreclassification wage index, and would result in the most accurate adjusted
median costs.

We then excluded claims that were
outside 3 standard deviations from the geometric mean cost for each HCPCS code. We used the remaining claims to
calculate median costs for each separately payable HCPCS code; first, to determine the applicability of the ‘‘ 2
times ’’ rule, and second, to determine
APC medians as based on the claims containing the HCPCS codes assigned to each APC. As stated previously, section 1833(t)(2) of the Act provides that, subject to certain exceptions, the items and services within an APC group cannot be considered comparable with respect to the use of resources if the highest median (or mean cost, if elected by the Secretary) for an item or service in the group is more than 2 times greater
than the lowest median cost for an item or service within the same group ( ‘‘ the
2 times rule ’’ ). Finally, we reviewed the medians and reassigned HCPCS codes to different APCs as deemed appropriate. See section III.B. of this preamble for a discussion of the proposed HCPCS code assignment changes that resulted from
examination of the medians and for
other reasons. The APC medians were recalculated after we reassigned the
affected HCPCS codes.

For discussion of the medians for blood and blood products see V.I of this preamble. For a discussion of the medians for APC 0315 (Level II Implantation of Neurostimulator), APC 0422 (Implantation of the BARD Endoscopic Suturing System), and APC 0651 (Complex Interstitial Radiation Application), see sections III.C.2.a., III.C.2.b., and III.C.2.c., respectively, of this preamble.

For discussion of the medians for APCs that require one or more devices when the service is performed, see section III.C. of this preamble. For a
discussion of the median for observation services, see section VII.D. of this preamble and for a discussion of the median for partial hospitalization, see

section X.C.

C. Proposed Adjustment of Median Costs for CY 2005

1. Device-Dependent APCs

Table 19 contains a list of APCs consisting of HCPCS codes that cannot be provided without one or more devices. For CY 2002, we used external data in part to establish the median used for weight setting. At that time, many devices were eligible for pass-through payment. For that year, we estimated that the total amount of pass-through payments would far exceed the limit imposed by statute. To reduce the amount of a pro rata adjustment to all pass-through items, we packaged 75 percent of the cost of the devices (using external data furnished by commenters on the August 24, 2001 proposed rule)
into the median cost for the APCs associated with these pass-through devices. The remaining 25 percent ofthe cost was considered to be passthrough payment. (See section VI. of this preamble for discussion of pro rata adjustment.)

For CY 2003 OPPS, which was based on CY 2001 claims data, we found that
the median costs for certain devicedependent APCs when all claims were used were substantially less than the
median costs used for 2002. We were concerned that using the medians
calculated from all claims would result in payments for some APCs that would not compensate the hospital even for the cost of the device. Therefore, we calculated a median cost using only claims from hospitals that had separately billed the pass-through device in CY 2001 (that is, hospitals
whose claims contained the ‘‘ C ’’ code for the pass-through device). Furthermore, for any APC (whether device dependent or not) where the median cost would have decreased by 15 percent or more from CY 2002 to CY 2003, we limited decreases in median costs by 15 percent plus half of the amount of any reduction beyond 15 percent (see 68 FR 47984). For a few particular device-dependent
APCs for which we believed that access to the service was in jeopardy, we blended external data furnished by commenters on the August 9, 2002 proposed rule (see 67 FR 57092) with
claims data to establish the median cost used to set the payment rate. For CY 2003, we also eliminated the HCPCS ‘‘ C ’’ codes for the devices and returned to providers those claims on which the deleted device codes were used. (See 67 FR 66750, November 1, 2002, and section IV.B. of this preamble for a discussion regarding the required use of C codes for specific categories of devices.)

For CY 2004 OPPS, which was based on CY 2002 claims data, we used only claims on which hospitals had reported
devices to establish the median cost for
certain APCs. We did this because we
found that the median costs calculated
when we used all claims for these services were inadequate to cover the
cost of the device if the device was not separately coded on the claim. Using only claims containing the code for the device (a ‘‘ C ’’ code) provided costs that
were closer to those used for CY 2002
and CY 2003 for these services. For a few particular APCs in which we
believed that access to the service was in jeopardy, we used external data provided by commenters on the August 12, 2003 proposed rule in a 50-percent
blend with claims data to establish the device portion of the median cost used to set the payment rate (68 FR 63423). We also reinstated, but on a voluntary basis, the reporting of ‘‘ C ’’ codes for
devices.

Thus, in developing the median costs for device-dependent APCs for CYs 2002, 2003, and 2004, we applied certain adjustments to our claims data as provided under the authority of section 1833(t)(9)(A) of the Act to ensure equitable payments to the hospitals for the provision of such
services. We have continued to receive comments from interested parties as part of the APC Panel process urging us
to determine whether the claims data that would be used in calculating the median costs for device-dependent APCs for payment in CY 2005 would represent valid relative costs for these services. Careful analysis of the CY 2003 data that we are proposing to use in calculating the median costs for the CY 2005 OPPS revealed problems similar to those discussed above in calculating device-dependent APC median costs based solely on claims data. Calculation
of the CY 2005 median costs for the device-dependent APCs indicated that some of the medians appeared to appropriately reflect the costs of the services, including the cost of the device, and others did not. Of the 43 device-dependent APCs analyzed , 31
have median costs that are lower than
the medians on which the OPPS payments were based in CY 2004. In contrast, 11 device-dependent APCs have median costs that are higher than the medians on which OPPS payments
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The differences between the CY 2004 payment medians and the proposed CY 2005 median costs using CY 2003
claims data are attributable to several factors. As discussed above, the CY 2004 payment medians were based on a
subset of claims that contained the
codes for the devices without which the procedures could not be performed, and several APCs were adjusted using external data. The proposed CY 2005
OPPS median costs were calculated based on all single bills, including

‘‘ pseudo ’’ single bills, for the services in the APCs and (not a subset of claims containing device codes) and were not adjusted using external data. In fact, as stated previously, we eliminated device coding requirements for hospitals in CY 2003. Consequently, there were no device codes reported for almost all
devices in the CY 2003 claims data. Thus, it was not possible to use only the CY 2003 claims data containing device
codes to calculate APC devicedependent medians as was done in CY 2004. Similarly, it was not possible to calculate a percentage of the APC cost
attributed to device codes as would be needed to use external data to adjust CY
2003 claims data.

In light of these data issues for CY 2005, we examined several alternatives to using CY 2003 claims data to calculate the proposed median costs for device-dependent APCs. We considered using CY 2004 OPPS medians with an inflation factor, as recommended by the Panel and by several outside organizations. We rejected this option because it would not recognize any changes in relative costs for these APCs
and would not direct us towards our goal of using all single claims data as the basis for payment weights for all

OPPS services.

We also considered using the medians we calculated from all single bills with no adjustments. However, the results of using this approach without increasing the payments for some important high
cost services for CY 2005 could result in the closing of hospital programs that provide these services thus, jeopardizing access to needed care. Therefore, we did not adopt this approach.

In addition, we considered subsetting claims based on the presence of charges in certain revenue codes. Specifically,
we reviewed those codes where we require that hospitals report charges for the devices required for these procedures. These revenue codes include: 272, sterile supplies; 275, pacemakers; 278, other implants; 279, other supplies/devices; 280, oncology; 289, other oncology; and 624, investigational devices. We determined that the medians increased for some device-dependent APCs when we used only claims with a charge in at least one of these revenue codes, but our analysis provided no reliable evidence that the charges that would be found in these revenue codes were necessarily for the
cost of the device.

Further, we considered using CY 2002
claims to calculate a ratio between the median calculated using all single bills and the median calculated using only
claims with HCPCS codes for devices on them, and applying that ratio to the median calculated using all single bills from CY 2003 claims data. We rejected this option because it assumes that the relationship between the costs of the
claims with and without codes for devices is a valid relationship not only
for CY 2002 but CY 2003 as well. It also assumes no changes in billing behavior.
We have no reason to believe either of these assumptions is true and, therefore, we did not choose this option.

In summary, we considered and rejected all of the above options. We have given special treatment to the device-dependent APCs for the past 3 years, recognizing that, in a new payment system, hospitals need time to establish correct coding processes and, considering the need to ensure continued access to these important services. After 3 years of such consideration, we believe that it is time to begin a transition to the use of pure claims data for these services (reflected in these APCs) to ensure the appropriate relativity of the median costs for all payable OPPS services. Our goal is to establish payment rates that provide appropriate relative payment for all services paid under the OPPS without creating payment disincentives that may
reduce access to care.

We do not believe that any of the above options considered would help us realize our goal. We believe that the better payment approach fordetermining median costs for devicedependent APCs in CY 2005 would be to base such medians on the greater of (1) median costs calculated using CY 2003 claims data, or (2) 90 percent of the APC payment median for CY 2004
for such services. We believe that some
variation in median costs is to be expected from year to year, and we believe that recognizing up to a 10- percent variation in our proposed payment approach would be a
reasonable limit.

We believe that this proposed adjustment methodology provides an appropriate transition to eventual use of all single bill claims data without adjustment and that the methodology moves us towards the goal of using all single bill data without adjustment by CY 2007. It is a simple and easily understood methodology for adjusting
median costs. Where reductions occur compared to CY 2004 OPPS, we believe that, under this methodology, the reductions will be sufficiently modest that providers will be able to accommodate them without ceasing to
furnish services that Medicare
beneficiaries need.

We considered applying the adjustment methodology we used for all APCs, including device-dependent APCs, for CY 2003 OPPS, but we saw no advantage to doing so. We applied thatmethodology to the identified devicedependent APCs only for 1 year, and we applied it where we had already made an adjustment by calculating the median costs based only on claims containing

‘‘ C ’’ codes for the devices. Therefore, for device-dependent APCs, there was a double adjustment intended to soften the effects of the first year of cessation of pass-through payment for devices (that is, we adjusted the higher ‘‘ C ’’ code medians, not all single bill medians). Devices have been off pass-through for several years now and for CY 2005 OPPS, we are unable to calculate medians based only on claims containing ‘‘ C ’’ codes. Therefore, we do
not view the circumstances across the 2 years as comparable.

In addition, beginning in CY 2005, we are proposing to require hospitals to bill device-dependent procedures using the appropriate ‘‘ C ’’ codes for the devices. This requirement is limited to only those APCs to which the proposed use of CY 2004 medians would apply. We believe that this proposal would mitigate against the reduction of access to care while encouraging hospitals to bill correctly for the services they furnish. We intend this requirement to be the first step towards use of all available single bill claims data to establish medians for device-dependent APCs. Our goal is to use all single bills for device APCs by the CY 2007 OPPS, which we expect to base on data from
claims for services in CY 2005. We further discuss our coding proposal in section III.C.3. of this preamble.

We welcome comments on all aspects of theses issues and particularly on steps that can be taken in the future to transition from the historic payment
medians to claims based median costs for OPPS ratesetting for these important

services.

Table 19 is sorted by percentage difference between changes in the CY 2004 and CY 2005 APC payment rate CY
2004 to CY 2005. It also contains the CY 2004 OPPS payment medians, the CY 2005 OPPS proposed medians (using


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single bill claims from January 1, 2003, through December 31, 2003), and the medians derived from the proposed adjustment processes discussed further
below.

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As a result of our data analysis for device-dependent APCs, we are proposing to make the following changes in our methodology for settingthe CY 2005 payment rates for devicedependent APC for the reasons specified:

We propose to remove APC 0226, Implantation of drug infusion reservoir, from the list of device-dependent APCs and to use its unadjusted single bill median of $2,793.30 as the basis for the payment weight. CPT code 62360, Implantation or replacement of device for intrathecal or epidural drug infusion, subcutaneous reservoir, is assigned to APC 0226. In 2002, when we packaged 75 percent of the cost of the device into the payment for the procedure with
which the device was billed to reduce the pro rata adjustment, we inadvertently packaged the cost of an implantable infusion pump (C1336 and C1337) rather than that of a drug
reservoir. Our data indicate that the reservoir used in performing CPT code 62360 cost considerably less than an implantable infusion pump, and we
believe that the median cost for APC 0226 appropriately reflects the relative cost of the service and the required
device.

In addition, we are proposing to delete APC 0048, Arthroplasty withProsthesis, from the list of devicedependent APCs and adjust the median
costs for this APC because we believe that the proposed CY 2005 median cost
for this APC as restructured is reasonable and appropriate. Based on our careful analysis of the CY 2003 claims data for this APC, we believe the
difference between the CY 2004 and CY
2005 median cost is attributable to the migration of certain high cost CPT codes (23470, 24361, 24363, 24366, 25441, 25442, 25446) from APC 0048 to new APC 0425, Level II Arthroplasty with Prosthesis and, as such, this change would not adversely limit beneficiary access to this important service. Therefore, we are not proposing to apply a device-dependent adjustment to
the median cost for APC 0048.

Further, we are proposing to move HCPCS code 52282 (Cystoscopy, implant stent), from APC 0385, Level I Prosthetic Urological Procedure, and assign it to APC 0163, Level IV Cystourethoscopy and other Genitourinary Procedures, for clinical homogeneity. As titled, APC 0385 was intended for the assignment of certain urological procedures that require the use of prosthetics. However, HCPCS code 52282 requires the use of a stent rather than a urological prosthetic. Therefore, we are proposing to reassign
HCPCS code 52282 to APC 0163.
Recalculation of the median cost for APC 385 after reassigning HCPCS code 52282 yields a median cost for that APC
that is consistent with its CY 2004 median payment. Thus, we are not proposing to apply a device-dependent adjustment to the median cost for APC

0385.

Lastly, we are proposing to remove HCPCS code 49419 (Insert abdom cath for chemo tx), from APC 0119, Implantation of Infusion Pump, and assign it to APC 0115, Cannula/Access Device Procedures, to achieve clinical homogeneity within APC 0115. Unlike all the other codes assigned to APC 0115, HCPCS code 49419 does not require the use of an infusion pump. Rather, this code is used when inserting an intraperitoneal cannula or catheter with a subcutaneous reservoir. Thus, we believe it would be more appropriate clinically to reassign HCPCS code 49419 to APC 0115 that includes procedures which require the use of devices similar to that required for code 49419.

2. Proposed Treatment of Specified

APCs
a. APC 0315 Level II Implantation of
Neurostimulator

The code, CPT code 61866, (Implant neurostim arrays) was brought to our attention by means of an application for a new device category for transitional pass-through payment for the Kinetra  neurostimulator, a dual channel neurostimulator currently approved and
used for Parkinson ’ s disease. We denied approval for a new device category for
the Kinetra  neurostimulator because the device is described by a previously existing category, C1767, ‘‘ Generator, neurostimulator (implantable) ’’

.

The manufacturer of Kinetra  stated
that the AMA created CPT 61886 to accommodate implantation of the

Kinetra  neurostimulator and that no services other than implantation of the

Kinetra  are currently described by that CPT code. Even though, the Kinetra  did not receive full FDA pre-market approval until December 2003, hospital outpatient claims were reported in CYs 2002 and 2003 (289 total claims in 2003)
for this device. The manufacturer
asserted that these claims must have
been miscoded because the Kinetra  could not have been used in performing CPT code 61886 before obtaining FDA approval in December 2003. Therefore,
the manufacturer did not believe that
the device cost could be included in the median for CPT code 61886, which has been assigned to APC 222.

In examining the CY 2003 claims for CPT code 61866, we noted that many of
the claims also contained codes for procedures related to treatment with cranial nerve stimulators, including the placement of electrodes for cranial nerve stimulation. The placement of the
cranial neurostimulator electrodes used
with the Kinetra  are currently an inpatient rather than outpatient procedure. Therefore, we would not expect patients being prepared for
cranial nerve stimulation to also have a

Kinetra  neurostimulator for deep brain
stimulation for Parkinson ’ s disease placed at the same time. Thus, it seems possible that the CY 2003 claims for CPT code 61886, generally, are incorrectly coded and do not include


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the dual chamber neurostimulator in the reported charges.

Prior to the availability of the dual
channel neurostimulator Kinetra  for bilateral deep brain stimulation, it is our understanding that patients diagnosed
with Parkinson ’ s disease had two single channel neurostimulator generators implanted in the same operative session. According to the Kinetra  manufacturer, this device will now replace the insertion of two single
channel neurostimulators and the cost
of the Kinetra  is equivalent to the cost of two single channel neurostimulators. Given this information, we examined
our CY 2003 claims data and found that 69 single claims were reported for patients with a diagnosis of Parkinson ’ s disease and that 2 single channel neurostimulator pulse generators (CPT code 61885) were implanted on the same day. The median cost for these claims was $20,631. Other than the device costs, we believe the procedural costs for the insertion of two single
channel devices or with one dual channel device should be roughly comparable. Therefore, we are proposing to establish a new APC 0315, Level II Implantation of Neurostimulator, for CPT code 61886, and assign it a median cost of $20,631. Because of our concern that hospitals correctly code OPPS claims for CPT code 61886, we are also proposing to require device coding ( ‘‘ C ’’ code) for APC 0315 to improve the coding on all claims for placement of a dual channel cranial neurostimulator pulse generator or receiver, as we are proposing for APC 0039, Implantation of Neurostimulator, for placement of a single channel cranial neurostimulator, discussed in Section III. C3 of this preamble.

b. APC 0651, Complex Interstitial Radiation Application

For CY 2003 APC 0651, HCPCS code 77778 (Complex interstitial radiation source application) was not to be used for prostate brachytherapy because we created HCPCS codes G0256 (Prostate brachytherapy with palladium sources) and G0261 (Prostate brachytherapy with iodine sources) in which we packaged the cost of placement of needles or catheters and sources into a single APC payment for each G code ( see 67 FR 66779). When we calculated the median from all single bills for HCPCS code
77778 from CY 2003 data for CY 2005 OPPS, we found that 73 percent of the single bills for this APC were for prostate brachytherapy and, therefore,
were miscoded. The median for APC 0651, using all single bills, including those miscoded for prostate brachytherapy, was $2,641.67. When we removed the incorrectly coded claims for prostate brachytherapy, the median is $1,491.39, which is the amount we are proposing for payment for CY 2005
OPPS for APC 0651. This median is considerably higher than the median cost of $589.72 for CY 2004 OPPS (from CY 2002 claims data).

We believe that this adjusted median is appropriate for APC 0651 when used for prostate brachytherapy because the service described by HCPCS code 77778 is only one of several components of the payment for the service in its entirety. When it is used for prostate brachytherapy, hospitals should also bill for the placement of the needles and catheters using HCPCS code 55859 and should also bill the brachytherapy sources separately. Hospitals will be paid for both APCs and for the cost of sources. Under the amounts proposed, the total unadjusted payment would be $3,544.59, plus the hospital ’ s cost for the brachytherapy sources.

Section 621(b)(1) of Pub. L. 108

– 173 specifically provides separate payment

in CY 2005 ‘‘ * * * for a device of brachytherapy, consisting of a seed or seeds (or radioactive source) ’’ * * * at the hospital ’ s charge adjusted to cost. We are proposing to package the cost of
other services such as the needles or catheters into the payment for the brachytherapy APCs and not to pay on the same basis as the brachytherapy
sources because the law does not
include needles and catheters in its definition of brachytherapy sources to be paid on charges adjusted to cost.

We also recognize that APC 0651 is used for brachytherapy services other than prostate brachytherapy and that, in some of those cases, there are no other codes for placement of the needles or catheters. In those cases, which are represented in the claims we used to calculate the median (once the miscoded claims for prostate brachytherapy were excluded), we believe that the charges for HCPCS code 77778 may include the placement of the
needles or catheters and therefore the median may be somewhat overstated when used as the basis of payment for prostate brachytherapy and the other forms of brachytherapy that have codes for placement of needles and catheters. Similarly, the median may be understated when used to pay for brachytherapy services for which there are no separate HCPCS codes for needle or catheter placement. We considered
whether to create new G codes for the placement of catheters and needles for the brachytherapy services for which such codes do not exist, but we were concerned that doing so might create unneeded complexity and that the existing data may not support establishing medians for the new codes. We are requesting comments on how to
address those services for which there are currently no HCPCS codes for placement of needles and catheters for brachytherapy applications.

c. APC 0659, Hyperbaric Oxygen Therapy

Over the past year, we have received a number of questions about billing and payment for HCPCS code C1300, Hyperbaric oxygen under pressure, full body chamber, per 30 minute interval. In light of these issues, we have carefully examined the CY 2003 single procedure claims data that we are proposing to use to calculate the CY 2005 proposed median for APC services. Based on our examination of single procedure claims filed for HCPCS code C1300 in CY 2003, we believe that the
claims for these services were either miscoded or the therapy was aborted before its completion. The claims that we examined reflected a pattern that is inconsistent with the clinical delivery of this service. Hyperbaric oxygen therapy (HBOT) is prescribed for clinical conditions such as promoting the healing of chronic wounds. It is typically prescribed on average for 90 minutes and therefore, you would expect hospitals to bill multiple units of HBOT to achieve full body hyperbaric oxygen therapy. In addition to the therapeutic time spent at full hyperbaric oxygen pressure, treatment involves additional time for achieving full pressure (descent), providing air breaks to prevent neurological and other complications from occurring during the course of treatment, and returning the patient to atmospheric pressure (ascent).
Our examination of the claims data revealed that providers who billed multiple units of C1300 reported a consistent charge for each ‘‘ 30 Minute ’’ unit. Conversely, providers who billed only a single unit of C1300, suggesting either a miscoded or aborted service, reported a charge that was 3 to 4 times greater than the per ‘‘ 30 minute ’’ unit reported by providers billing multiple units of HCPCS code C1300. While, it appears that many of the single procedure HBOT claims that we examined, represented billing for a full 90 to 120 minutes of HBOT (including ascent, descent, and air break time), they were improperly billed as 1 unit
rather than as 3 or 4 units of HBOT. Consequently, this type of incorrect coding would result in an inappropriately high per 30 minute
median cost for HBOT or a median cost for HBOT of $177.96 derived using single service claims and ‘‘ pseudo ’’


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single service claims. This is a significant issue because HBOT is the only procedure assigned to APC 0659.

Our analysis of the HBOT claims data further revealed that about 40 percent of all HBOT claims included packaged
costs. To confirm our belief that these packaged costs were not associated with HBOT, we examined the other major payable procedures billed in conjunction with HBOT. As a result, we identified billed services such as drug
administration and wound debridement that we would typically expect to have associated with packaged services. We also looked at the magnitude of packaged costs in our single bills and found the majority of these costs were small, less than $30, and concentrated in revenue codes 25X, Pharmacy, and 27X, Medical/Surgical Supplies.

As a result of these coding anomalies, we are proposing to calculate our proposed ‘‘ 30 minute ’’ median cost for APC 0659, using a total of 30,736 claims containing multiple units or multiple occurrences of HBOT, about 97 percent
of all HBOT claims. Based on our finding, we are proposing to exclude claims with only one unit of HBOT. Using this proposed methodology, the proposed median cost per unit of C1300 is $82.91. Based on hospitals ’ charges on correctly coded claims, we believe
this estimate is much more accurate for 30 minutes of HBOT. Thus, we are proposing a median cost for APC 0659 of $82.91 for CY 2005.

d. APC 0422, Implantation of the BARD Endoscopic Suturing System

For CY 2005, we are proposing to establish APC 0422 for Level II Upper GI Procedures. Code C9703 (the Bard Endoscopic Suturing System) was placed in that APC based on clinical and resource homogeneity as compared
with the other services in the APC. Currently, code C9703 is assigned to new technology APC 1555, with a payment of $1,650. Median cost for code C9703 was based on CY 2002 claims
and was somewhat lower than the established payment level. However,
our examination of CY 2003 claims data
for APC 422 revealed that 137 of the 171 single claims for code C9703 were from a single institution with an extremely low and consistent cost per claim. We
do not believe that these 137 claims represent the service described by code C9703, which includes an upper gastrointestinal endoscopy along with suturing of the esophagogastric junction. Therefore, in establishing the median for APC 0422, we did not use these 137 claims, which we believe were incorrectly coded.

3. Proposed Required Use of ‘‘ C ’’ Codes
for Devices

An important ancillary issue in regard to using hospital outpatient claims data
to calculate median costs for devicedependent APC is whether to require that hospitals bill the HCPCS codes for the devices that are required to be used to provide the services in these APCs.
We deleted these HCPCS codes for devices in CY 2003 because hospitals objected to the complexity of this coding, and we believed that hospitals would charge for the devices in appropriate revenue codes. Our review of the claims data does not support this belief. Hospitals do not appear to routinely include the charges for the devices they use when they bill for the related services in the device-dependent APCs. Therefore, we are also considering requiring hospitals to code devices for APCs to improve the quality of the claims data in support of our transition to the use of all single claims to establish payment rates for these APCs. We make this proposal cautiously, as we realize that it imposes a burden on hospitals to code the
devices.

Specifically, for CY 2005 OPPS, we are proposing to require coding of devices required for APCs for which we propose to adjust the median costs for
CY 2005 OPPS. The APCs and the devices that are proposed for device coding are displayed in Table 20 below. Specifically, if one device is shown for one APC, that device would have to be
billed on the claim for a service in that
APC or the claim would be returned to the provider for correction. If more than one device is shown for one APC, the provider would be required to bill one
of the device codes shown on the same
claim with the service in that APC for the claim to be accepted.

We are also proposing to require coding of C1900 (Left Ventricular lead) required to perform the service described in APC 0418, Left Ventricular Lead, because the service cannot be done without the lead and, because the device has been billed separately for pass-through payment in CYs 2003 and 2004. We believe that continued coding of the device would not impose a burden on hospitals. Similarly, because of our concerns regarding the correct coding of claims for CPT code 61886 (Implant neurostim arrays), assigned to APC 0315 (discussed in greater detail in section III.C.2.a. of the preamble), we are proposing to require device coding for APC 0315, Level II Implantation of Neurostimulator, to improve the coding on claims for placement of a dual channel cranial neurostimulator pulse generator or receiver, just as we are proposing to require device coding for APC 0039, Implantation of Neurostimulator, for placement of a single channel cranial Neurostimulator
as noted below.

Table 20 below displays the APCs for which we are proposing to require ‘‘ C ’’
codes and the ‘‘ C ’’ code edits we are proposing to require for each APC. We welcome comments on the proposed

‘‘ C ’’ code requirements.

**BILLING CODE 4120**

**– 01** 

**– P** 


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In addition, we are considering expanding the device coding requirements in the future. We believe that, by requiring device coding for a small subset of device-dependent APCs each year, we would minimize the marginal annual coding burden on hospitals and begin to improve data for these APCs, which have consistently proven to be problematic. We believe coding of devices is essential if we are to improve the accuracy of claims data sufficiently to better calculate the
correct relative costs of devicedependent APCs in relation to the other services paid under the OPPS.

We request that the public inform us
of the device codes that are essential tothe procedures contained in the devicedependent APCs contained in Table 20. The alphanumeric HCPCS codes for
devices that were reactivated for CY
2004 OPPS can be found on the CMS
website at www.cms.hhs.gov/providers under coding. They are in the section of alphanumeric codes that begin with the
initial letter ‘‘ C. ’’ Comments regarding the device codes that should be required
with the APCs listed in Table 20 should contain the APC and identify all device codes that may be essential to the performance of the procedures identified in the APC. Ideally, the
comments will include a narrative that explains how the device is inserted.

4. Submission of External Data

We would consider external data submitted with respect to any APC to
the extent that such data enable us to verify or adjust claims data where we are convinced that such an adjustment to the median cost is appropriate. All comments and any data we use would be available for public inspection and commenters should not expect that any data furnished as part of the comment would be withheld from public inspection. Parties who submit external
data for devices should also submit a strategy that can be used to determine what part of the median cost represents
the device to which the external data applies. External data that are likely to be of optimal use should meet the following criteria:

• Represent a diverse group of hospitals both by location (for example, rural and urban) and by type (for example, community and teaching). We would prefer that commenters identify each hospital, including location with city and State, nonprofit vs. for profit status, teaching vs. nonteaching status,and the percent of Medicare vs. nonMedicare patients receiving the service. A pseudo identifier could be used for the hospital identification. Data should
be submitted both ‘‘ per hospital ’’ and in the aggregate.

• Identify the number of devices billed to Medicare by each hospital as well as any rebates or reductions for bulk purchase or similar discounts and identify the characteristics of providers to which any such price rebates or reductions apply.

• Identify all HCPCS codes with
which each item would be used.

• Identify the source of the data.

• Include both the charges and costs for each hospital for CY 2003.

Meeting the criteria would enable us to compare our CY 2003 claims data to the submitted external data and help us
determine whether the submitted data


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are representative of hospitals that
submit claims under the OPPS.

We note that information containing beneficiary-specific information (for example, medical records, and invoices with beneficiary identification on it) must be altered, if necessary, to remove any individually identifiable information, such as information that identifies an individual, diagnoses, addresses, telephone numbers, attending physician, medical record number, and Medicare or other insurance number. Moreover, individually identifiable beneficiary medical records, including progress notes, medical orders, test results, and consultation reports must not be submitted to us. Similarly, photocopies of checks from hospitals or other documents that contain bank routing
numbers must not be submitted to us.

D. Proposed Calculation of Scaled OPPS Payment Weights

Using the median APC costs discussed previously, we calculated the proposed relative payment weights for each APC for CY 2005. As in prior years, we scaled all the relative payment weights to APC 0601, Mid-Level Clinic Visit, because it is one of the most frequently performed services in the hospital outpatient setting. We assigned APC 0601 a relative payment weight of
1.00 and divided the median cost for each APC by the median cost for APC 0601 to derive the relative payment weight for each APC. Using CY 2003 data, the proposed median cost for APC 0601 is $57.32 for CY 2005.

Section 1833(t)(9)(B) of the Act requires that APC reclassification and recalibration changes and wage index changes be made in a manner that assures that aggregate payments under the OPPS for CY 2005 are neither greater than nor less than the aggregate payments that would have been made without the changes. To comply with this requirement concerning the APC changes, we compared aggregate payments using the CY 2004 relative weights to aggregate payments using the CY 2005 proposed weights. Based on this comparison, we are proposing to make an adjustment of the weights for purposes of budget neutrality. The weights that we are proposing for CY 2005, which incorporate the recalibration adjustments explained in this section, are listed in Addendum A and Addendum B to this proposed rule.

Section 1833(t)(14)(H) of the Act, as added by section 621(a)(1) of Pub. L.

108

– 173, states that ‘‘ Additional expenditures resulting from this paragraph shall not be taken into account in establishing the conversion factor, weighting and other adjustment
factors for 2004 and 2005 under paragraph (9) but shall be taken into account for subsequent years. ’’ Section 1833(t)(14) provides the payment rates for certain specified covered outpatient drugs. Therefore, the incremental cost of those specified covered outpatient drugs (as discussed in section II.J. of this proposed rule) is excluded from the budget neutrality calculations but the base median cost of the drugs continues
to be a factor in the calculation of budget neutrality. Accordingly, we
calculated median costs for the specified covered outpatient drugs to which this section applies and used those medians and the frequencies in the calculation of the scaler for budget neutrality.

Under section 1833(t)(16)(C) of the Act, as added by section 621(b)(1) of
Pub. L. 108

– 173, payment for devices of brachytherapy consisting of a seed or seeds (or radioactive source) is to be made at charges adjusted to cost for services furnished on or after January 1, 2004 and before January 1, 2006. As we stated in our January 6, 2004 interim final rule, charges for the brachytherapy sources will not be used in determining outlier payments and payments for
these items will be excluded from budget neutrality calculations, consistent with our practice under the OPPS for items paid at cost. ( See section VII.G. of this proposed rule.)

IV. Proposed Payment Changes for
Devices
[If you choose to comment on this section, please indicate the caption

‘‘ Devices ’’ at the beginning of your comment.]

A. Pass-Through Payments for Devices

1. Expiration of Transitional PassThrough Payments for Certain Devices

Section 1833(t)(6)(B)(iii) of the Act requires that, under the OPPS, a category of devices be eligible for transitional pass-through payments for at least 2, but not more than 3, years. This period begins with the first date on which a transitional pass-through payment is made for any medical device that is described by the category. In our November 7, 2003 final rule with comment period (68 FR 63437), we specified six device categories currently in effect that would cease to be eligible for pass-through payment effective January 1, 2005.

The device category codes became effective April 1, 2001, under theprovisions of the BIPA. Prior to passthrough device categories, we paid for pass-through devices under the OPPS on a brand-specific basis. All of the initial category codes that were established as of April 1, 2001, have expired; 95 categories expired after CY 2002 and 2 categories expired after CY 2003. All of the categories listed in Table 21, along with their expected expiration dates, were created since we published the criteria and process for creating additional device categories for pass-through payment on November 2, 2001 (66 FR 55850 through 55857). We based the expiration dates for the category codes listed in Table 21 on the date on which a category was first eligible for pass-through payment.

There are six categories for devicesthat would have been eligible for passthrough payments for at least 2 years as of December 31, 2004. In our November 7, 2003 final rule with comment period, we finalized the December 31, 2004 expiration dates for these six categories. (Three other categories listed in Table 21, C1814, C1818, and C1819, would expire on December 31, 2005.) The six categories that would expire as of December 31, 2004, are C1783, C1884, C1888, C1900, C2614, and C2632, as indicated in Table 23. Each category includes devices for which pass-through payment was first made under the OPPS

in CY 2002 or CY 2003.

In the November 1, 2002 final rule, we established a policy for payment of devices included in pass-through categories that are due to expire (67 FR 66763). For CY 2003, we packaged the costs of the devices no longer eligible for pass-through payments into the costs of the procedures with which the
devices were billed in CY 2001. There were few exceptions to this established policy (brachytherapy sources for other than prostate brachytherapy, which is now also separately paid in accordance with section 621(b)(2) of Pub. L. 108

– 173). For CY 2004, we continued to apply this policy for categories that expired on January 1, 2004.

2. Proposal for CY 2005

We are proposing to continue to base the expiration date for a device categoryon the earliest effective date of passthrough payment status of the devices that populate the category. This basis for determining the expiration date of a device category is the same as that used
in CY 2003 and CY 2004.

We are also proposing that payment for the devices that populate the six categories that would cease to be eligible for pass-through payment after December 31, 2004, would be made as part of the payment for the APCs with which they are billed. This methodology for packaging device cost is consistent with the packaging methodology that we


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describe in section III. of this proposed rule. To accomplish this, we are proposing to package the costs of devices that would no longer be eligible for pass-through payment in CY 2005
into the HCPCS codes with which the
devices are billed. We note that category C1819 (Tissue localization excision device) was added subsequent to our proposed rule for CY
2004. We first announced the start date and the proposed expiration date for this device category in our November 7, 2003 final rule with comment period. Therefore, we are proposing to maintain the category ’ s December 31, 2005 expiration date. We invite comments on the proposed expiration date for category C1819.

B. Provisions for Reducing Transitional Pass-Through Payments To Offset Costs Packaged Into APC Groups

1. Background

In the November 30, 2001 final rule, we explained the methodology we used to estimate the portion of each APC rate that could reasonably be attributed to
the cost of the associated devices that are eligible for pass-through payments (66 FR 59904). Beginning with the implementation of the CY 2002 OPPS update (April 1, 2002), we deducted from the pass-through payments for the
identified devices an amount that reflected the portion of the APC payment amount that we determined
was associated with the cost of the device, as required by section 1833(t)(6)(D)(ii) of the Act. In the November 1, 2002 final rule, we published the applicable offset amounts for CY 2003 (67 FR 66801).

For the CY 2002 and CY 2003 OPPS updates, to estimate the portion of each APC rate that could reasonably be
attributed to the cost of an associatedpass-through device eligible for passthrough payment, we used claims data from the period used for recalibration of the APC rates. Using those claims, we calculated a median cost for every APC without packaging the costs of
associated ‘‘ C ’’ codes for device categories that were billed with the
APC. We then calculated a median cost for every APC with the costs of the associated device category ‘‘ C ’’ codes that were billed with the APC packaged into the median. Comparing the median APC cost without device packaging to the median APC cost including device packaging enabled us to determine the percentage of the median APC cost thatis attributable to the associated passthrough devices. By applying those percentages to the APC payment rates, we determined the applicable amount to be deducted from the pass-through payment, the ‘‘ offset ’’ amount. We created an offset list comprised of any
APC for which the device cost was at least 1 percent of the APC ’ s cost.

As first discussed in our November 1, 2002 final rule (67 FR 66801) the offset list that we publish each year is a list
of offset amounts associated with those
APCs with identified offset amounts developed using the methodology described above. As a rule, we do not know in advance which procedures and APCs may be billed with new categories. An offset amount is therefore applied only when a new device category is billed with an APC appearing on the offset list. The list of potential offsets for CY 2004 is currently published on our website www.cms.hhs.gov, as ‘‘ Device Related Portions of Ambulatory Payment
Classification Costs for 2004. ’’

For CY 2004, we modified our policyfor applying offsets to device passthrough payments. Specifically, we indicated that we would apply an offset to a new device category only when we
could determine that an APC contains costs associated with the device. We continued our existing methodology for determining the offset amount,
described above. We were able to use this methodology to establish the device
offset amounts for CY 2004 because providers reported device codes (C codes) on the CY 2002 claims used for CY 2004 OPPS. However, for the CY 2005 update to the OPPS, we are proposing to use CY 2003 claims that do not include device coding. (Section III. of this proposed rule contains a fuller discussion of our proposed requirement
for use of ‘‘ C ’’ codes for CY 2005.)

In the CY 2004 OPPS update, we reviewed the device categories eligible for continuing pass-through payment in
CY 2004 to determine whether the costs associated with the device categories are packaged into the existing APCs. Based
on our review of the data for the categories existing in CY 2004, we determined that there were no close or
identifiable costs associated with the devices relating to the respective APCs that are normally billed with them. Therefore, for those device categories, we set the offset to $0 for CY 2004.

2. Proposal for CY 2005

For CY 2005, we are proposing to continue to review each new device category on a case-by-case basis as we
did in CY 2004 to determine whether
device costs associated with the new category are packaged into the existing APC structure. We are also proposing to set the offsets to $0 for the currently


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established categories that would continue for pass-through payment into CY 2005. If, during CY 2005, we create a new device category and determine
that our data contain identifiable costs associated with the devices in any APC, we would adjust the APC payment if the offset is greater than $0. If we determine that device offsets greater than $0 are appropriate for any new category that we create during CY 2005, we are proposing to announce the offset amounts in the program transmittal that announces the new category.

Further, for CY 2005, we are proposing to use the device percentages (portion of the APC median cost attributable to the packaged device) that we developed for potential offsets in CY 2004 and to apply these percentages to the CY 2005 payment amounts to obtain CY 2005 offset amounts, in cases where
we determine that an offset is appropriate. We propose to use the device percentage developed for CY 2004 because, as noted above, for the CY 2005 update to the OPPS, we are using
CY 2003 claims that do not include device codes. Therefore, we are not easily able to determine the device portions of APCs for CY 2003 claimsdata. We have posted the list of devicedependent APCs and their respective device portions on the CMS website: www.cms.hhs.gov

. V. Proposed Payment Changes for Drugs, Biologicals, Radiopharmaceutical Agents, and
Blood and Blood Products

A. Transitional Pass-Through Payment for Additional Costs of Drugs and Biologicals

[If you choose to comment on issues in this section, include the caption ‘‘ PassThrough ’’ at the beginning of your comment.]

1. Background

Section 1833(t)(6) of the Act provides for temporary additional payments or

‘‘ transitional pass-through payments ’’ for certain drugs and biological agents. As originally enacted by the BBRA, this provision required the Secretary to make additional payments to hospitals for current orphan drugs, as designated under section 526 of the Federal Food, Drug, and Cosmetic Act (Pub. L. 107

– 186); current drugs and biological agents and brachytherapy used for the treatment of cancer; and current radiopharmaceutical drugs and biological products. For those drugs and biological agents referred to as

‘‘ current, ’’ the transitional pass-through payment began on the first date the hospital OPPS was implemented (before enactment of BIPA (Pub. L. 106

– 554), on December 21, 2000).

Transitional pass-through payments are also required for certain ‘‘ new ’’ drugs, devices and biological agents that were not being paid for as a hospital OPD service as of December 31, 1996, and whose cost is ‘‘ not insignificant ’’ in relation to the OPPS payment for the procedures or services associated with the new drug, device, or biological.Under the statute, transitional passthrough payments can be made for at least 2 years but not more than 3 years. Pass-through drugs and biological agents are identified by status indicator

‘‘ G. ’’

The process to apply for transitional pass-through payment for eligible drugs and biological agents can be found on pages of our CMS website: www.cms.hhs.gov. If we revise the application instructions in any way, we will post the revisions on our website and submit the changes to the Office of Management and Budget (OMB) for approval, as required under the Paperwork Reduction Act (PRA). Notification of new drugs and biological application processes is generally posted on the OPPS website at: www.cms.hhs.gov/hopps.

2. Expiration in CY 2004 of PassThrough Status for Drugs and Biologicals

Section 1833(t)(6)(C)(i) of the Act specifies that the duration of transitional pass-through payments for drugs and biologicals must be no less than 2 years and any longer than 3 years. The drugs whose pass-through status will expire on December 31, 2004,
meet that criterion. Table 22 lists the drugs and biologicals for which we are proposing that pass-through status would expire on December 31, 2004.


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3. Drugs and Biologicals With Proposed Pass-Through Status in CY 2005

We are proposing to continue passthrough status for CY 2005 for the drugs and biologicals listed in Table 23. The APCs and HCPCS codes for drugs and biologicals that we are proposing to continue with pass-through status in CY 2005 are assigned status indicator ‘‘ G ’’ in Addendum A and Addendum B, respectively, to this proposed rule.

Section 1833(t)(6)(D)(i) of the Act sets the payment rate for pass-through eligible drugs (assuming that no pro rata reduction in pass-through payment is necessary) as the amount determined under section 1842(o) of the Act. Section 303(c) of Pub. L. 108

– 173 amends Title XVIII of the Act by adding
new section 1847A. This new section establishes the use of the average sales price (ASP) methodology for payment for drugs and biologicals described in section 1842(o)(1)(C) of the Act furnished on or after January 1, 2005. Therefore, in CY 2005, we are proposing to pay under the OPPS for drugs and biologicals with pass-through status consistent with the provisions of section 1842(o) of the Act as amended by Pub.

L. 108

– 173 at a rate that is equivalent to the payment these drugs and biologicals would receive in the physician office setting, and established in accordance with the methodology described in the CY 2005 Physician Fee Schedule proposed rule (69 FR 47488).

We are further proposing to amend § 419.64 of the regulations to conform with these changes. Specifically, we propose to replace paragraphs (d)(1) and (d)(2) with paragraph (d) to provide that, subject to any reduction determined
under § 419.62(b), the pass-through payment for a drug or biological equals
the amount determined under section 1842(o) of the Act, minus the portion of
the APC that we determine is associated with the drug or biological.

Section 1833(t)(6)(D)(i) of the Act also sets the amount of additional payment for pass-through eligible drugs and biologicals (the pass-through payment amount). The pass-through payment amount is the difference between the
amount authorized under section 1842(o) of the Act, and the portion of the otherwise applicable fee schedule amount (that is, the APC payment rate) that the Secretary determines is associated with the drug or biological. As we explain in section V.B. of this proposed rule, we are proposing to make separate payment, beginning in CY 2005, for new drugs and biologicals
with a HCPCS code consistent with the provisions of section 1842(o) of the Act as amended by Pub. L. 108

– 173 at a rate that is equivalent to the payment they would receive in a physician office setting, whether or not we have received a pass-through application for the item. Accordingly, beginning in CY 2005, the pass-through payment amount for new drugs and biologicals that we determine have pass-through status equals zero. That is, when we subtract the amount to be paid for pass-through drugs and biologicals under section 1842(o) of the Act, as amended by Pub. L. 108

– 173, from the portion of the otherwise


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applicable fee schedule amount, or the APC payment rate associated with the drug or biological which would be the amount paid for drugs and biologicals under section 1842(o) of the Act as amended by Pub. L. 108

– 173, the resulting difference is equal to zero. Table 23 lists the drugs and biologicals for which we propose pass-through status continuing in CY 2005. Addendum B to this proposed rule lists the proposed CY 2005 rates for these pass-through drugs and biologicals based on data reported to CMS as of April 30, 2004.

B. Drugs, Biologicals, andRadiopharmaceuticals Without PassThrough Status

[If you choose to comment on issues in this section, include ‘‘ Drugs, Biologicals,and Radiopharmaceuticals NonPassThroughs ’’ at the beginning of your comment.] 1. Background

Under the OPPS, we currently pay for drugs, biologicals including blood and blood products, and radiopharmaceuticals that do not have pass-through status in one of two ways: packaged payment and separate payment (individual APCs). We explained in the April 7, 2000 final rule (65 FR 18450) that we generally package the cost of drugs and radiopharmaceuticals into the APC payment rate for the procedure or treatment with which the products are usually furnished. Hospitals do not receive separate payment from Medicare for packaged items and supplies, and hospitals may not bill beneficiaries separately for any packaged items and


### 50505 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

supplies whose costs are recognized and paid for within the national OPPS payment rate for the associated procedure or service. (Program
Memorandum Transmittal A

– 01

– 133, issued on November 20, 2001, explains in greater detail the rules regarding separate payment for packaged services.)

Packaging costs into a single aggregate payment for a service, procedure, or episode of care is a fundamental principle that distinguishes a prospective payment system from a fee schedule. In general, packaging the costs of items and services into the payment for the primary procedure or service with which they are associated encourages hospital efficiencies and also enables hospitals to manage their resources with maximum flexibility. Notwithstanding our commitment to package as many costs as possible, we are aware that packaging payments for certain drugs, biologicals, and radiopharmaceuticals, especially those that are particularly expensive or rarely used, might result in insufficient payments to hospitals, which could adversely affect beneficiary access to medically necessary services. As discussed in the November 7, 2003 OPPS final rule with comment period (68 FR 63445), we packaged payment for drugs, biologicals, and radiopharmaceuticals into the APCs with which they were billed if the median cost per day for the drug, biological, or radiopharmaceutical was less than $50. We established a separate APC payment for drugs, biologicals, and radiopharmaceuticals for which the median cost per day exceeded $50. Our rationale for establishing a $50
threshold was also discussed.

2. Proposed Criteria for Packaging Payment for Drugs, Biologicals, and Radiopharmaceuticals

Section 621(a)(2) of Pub. L. 108

– 173 amended section 1833(t)(16) of the Act by adding a new subparagraph (B) to require that the threshold for establishing separate APCs for drugs and biologicals be set at $50 per
administration for CYs 2005 and 2006. For CY 2005, we are proposing to continue our policy of paying separately for drugs, biologicals, and radiopharmaceuticals whose median cost per day exceeds $50 and packaging the cost of drugs, biologicals, and radiopharmaceuticals whose median cost per day is less than $50 into the procedures with which they are billed.

We calculated the median cost per day using claims data from January 1, 2003, to December 31, 2003, for all drugs, biologicals, and radiopharmaceuticals that had a HCPCS code during this time period and were paid (via packaged or separate payment) under the OPPS. Items such as single indication orphans drugs, certain vaccines, and blood and blood products
were excluded from these calculations
and our treatment of these is discussed separately in sections V.F., E., and I., respectively, of this preamble. In order to calculate the median cost per day for drugs, biologicals, and radiopharmaceuticals to determine their packaging status in CY 2005, we are proposing to use the methodology that
was described in detail in the CY 2004 OPPS proposed rule (68 FR 47996 through 47997) and finalized in the CY 2004 final rule with comment period (68 FR 63444 through 63447). We are requesting comments on the methodology we are proposing to
continue to use to determine the median cost per day of these items.

We are proposing to apply an exception to our packaging rule to one particular class of drugs, the injectible
and oral forms of anti-emetic treatments.
The HCPCS codes to which our exception would apply are listed below
in Table 24. Our calculation of median cost per day for these products showed that, if we were to apply our packaging rule to these items, two of the injectible products would be packaged and one would be separately payable. In addition, two of the oral products would be separately payable and one would be packaged. Chemotherapy is very difficult for many patients to tolerate as the side effects are often debilitating. In
order for beneficiaries to achieve the maximum therapeutic benefit from chemotherapy and other therapies with side effects of nausea and vomiting, anti-emetic use is often an integral part of the treatment regimen. We want to ensure that our payment rules do not impede a beneficiary ’ s access to the particular anti-emetic that is most
effective for him or her as determined by the beneficiary and his or her physician. Therefore, we are proposing to pay separately for all six injectible and oral forms of anti-emetic products

CY 2005.

**BILLING CODE 4120**

**– 01** 

**– P** 


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3. Proposed Payment for Drugs, Biologicals, and Radiopharmaceuticals Without Pass-Through Status That Are Not Packaged

a. Payment for Specified Covered Outpatient Drugs

Section 621(a)(1) of Pub. L. 108

– 173 amended section 1833(t) of the Act by adding a new subparagraph (14) that requires special classification of certain separately paid radiopharmaceutical agents and drugs or biologicals and mandates specific payments for these items. Under section 1833(t)(14)(B)(i), a

‘‘ specified covered outpatient drug ’’ is a covered outpatient drug, as defined in section 1927(k)(2) of the Act, for which a separate APC exists and that either is a radiopharmaceutical agent or is a drug or biological for which payment was made on a pass-through basis on or before December 31, 2002.

Under section 1833(t)(14)(B)(ii) of the Act, certain drugs and biologicals are designated as exceptions and are not
included in the definition of ‘‘ specified covered outpatient drugs. ’’ These exceptions are:

• A drug or biological for which payment is first made on or after January 1, 2003, under the transitional pass-through payment provision in section 1833(t)(6) of the Act.

• A drug or biological for which a temporary HCPCS code has not been assigned. • During CYs 2004 and 2005, an orphan drug (as designated by the Secretary).

Section 1833(t)(14)(A)(i) of the Act, as added by section 621(a)(1) of Pub. L.

108

– 173, specifies payment limits for three categories of specified covered outpatient drugs in CY 2004. Section 1833(t)(14)(F) of the Act defines the three categories of specified covered outpatient drugs based on section 1861(t)(1) and sections 1927(k)(7)(A)(ii), (k)(7)(A)(iii), and (k)(7)(A)(iv) of the Act. The categories of drugs are ‘‘ sole source drugs, ’’ ‘‘ innovator multiple source drugs, ’’ and ‘‘ noninnovator multiple source drugs. ’’ The definitions of these specified categories for drugs, biologicals, and radiopharmaceutical agents under Pub. L. 108

– 173 were discussed in the January 6, 2004 OPPS interim final rule with comment period (69 FR 822), along with our use of the Medicaid average manufacturer price database to determine the appropriate classification of these products. Because of the many comments received on the January 6, 2004 interim final rule with comment period, the classification of many of the drugs, biologicals, and radiopharmaceuticals changed from that initially published. These changes were announced to the public on February 27, 2004, Transmittal 112, Change Request 3144. Additional classification changes were implemented in
Transmittals 3154 and 3322. We will
finalize the interim final rule and address public comments associated
with that rule when we finalize this proposed rule.

Section 1833(t)(14)(A) of the Act, as added by section 621(a)(1) of Pub. L.

108

– 173, also provides that payment for these specified covered outpatient drugs
is to be based on its ‘‘ reference average wholesale price, ’’ that is, the AWP for the drug, biological, or radiopharmaceutical as determined under section 1842(o) of the Act as of May 1, 2003 (section 1833(t)(14)(G) of the Act). Section 621(a) of Pub. L. 108

– 173 also amended the Act by adding section 1833(t)(14)(A)(ii), which requires that:

• A sole source drug must, in CY 2005, be paid no less than 83 percent and no more than 95 percent of the
reference AWP.

• An innovator multiple source drug must, in CY 2005, be paid no more than 68 percent of the reference AWP.

• A noninnovator multiple source drug must, in CY 2005, be paid no more than 46 percent of the reference AWP.

Section 1833(t)(14)(G) of the Act
defines ‘‘ reference AWP ’’ as the AWP determined under section 1842(o) as of May 1, 2003. We interpret this to mean the AWP set under the CMS single drug pricer (SDP) based on prices published in the Red Book on May 1, 2003.

For CY 2005, we are proposing to determine the payment rates for specified covered outpatient drugs under the provisions of Pub. L. 108

– 173 by comparing the payment amount


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calculated under the median cost methodology as done for procedural APCs (described previously in the preamble) to the AWP percentages specified in section 1833(t)(14)(A)(ii) of
the Act.

Specifically, for sole source drugs, biologicals, and radiopharmaceuticals, we compared the payments established under the median cost methodology to their reference AWP. We are proposing to determine payment for sole source items as follows: If the payment falls below 83 percent of the reference AWP, we would increase the payment to 83 percent of the reference AWP. If the payment exceeds 95 percent of the reference AWP, we would reduce the payment to 95 percent of the reference AWP. If the payment is no lower than 83 percent and no higher than 95 percent of the reference AWP, we would make no change.

There is one sole source item, Co 57 cobaltous chloride (HCPCS code C9013),
for which we cannot find a reference AWP amount. However, we have CY 2003 hospital claims data for C9013, and we are proposing to derive its payment rate using its median cost per unit. Therefore, we are proposing a CY 2005 payment rate for C9013 of $143.96. We request comments on our proposed methodology for determining the payment rate for C9013.

We note that there are three radiopharmaceutical products for which we are proposing a different payment policy in CY 2005. These products are represented by HCPCS codes A9526 (Ammonia N

– 13, per dose), C1775 (FDG, per dose (4

– 40 mCi/ml), and Q3000 (Rubidium-Rb-82). Radiopharmaceuticals are classified as a

‘‘ specified covered outpatient drug ’’ according to section 1833(t)(14)(B)(i)(I) of the Act; and their payment is dependent on their classification as a single source, innovator multiple cource, or noninnovator multiple source product as defined by sections 1927(k)(7)(A)(iv), (ii), and (iii) of the Act. Upon further analysis of these items, we determined that these three products do not meet the statutory
definition of a sole source item or a multiple source item. Pub. L. 108

– 173 requires us to pay for ‘‘ specified covered outpatient drugs ’’ using specific payment methodologies based on their
classification and does not address how payment should be made for items that do not meet the definition of a sole source or multiple source item. Therefore, we are proposing to set the CY 2005 payment rates for these three products based on median costs derived from CY 2003 hospital outpatient claims data, which would reflect hospital costs associated with these products. With regard to HCPCS code A9526, we have no hospital outpatient cost data for this
HCPCS code. We received correspondence from an outside source stating that Rubidium-Rb-82 (HCPCS code Q3000) is an alternative product used for procedures for which Ammonia

N

– 13 is also used and these two products are similar in cost. Therefore, we are proposing to establish a payment
rate for Ammonia N

– 13 that is equivalent to the payment rate for
Rubdium Rb

– 82.

We request comments on the proposed CY 2005 payment rates for
these three items and invite commenters to submit external data if they believe the proposed CY 2005 payment rates for these items do not adequately represent actual hospital costs. Table 25 below lists the CY 2005 OPPS payment rates that we are proposing for these three radiophmaceutical products.

Table 25A lists the proposed payment amounts for sole source drugs, biologicals, and radiopharmaceuticals effective January 1, 2005 to December

31, 2005.


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In order to determine the payment amounts for innovator multiple source and noninnovator multiple source forms of the drug, biological, or radiopharmaceutical, we compared the payments established under the median cost methodology to their reference AWP. For innovator multiple source items, we are proposing to set payment rates at the lower of the payment rate
calculated under our standard median cost methodology or 68 percent of the
reference AWP. For noninnovator or multiple source items, we are proposing to set payment rates at the lower of the payment rate calculated under our standard median cost methodology or 46 percent of the reference AWP. We followed this same methodology to set payment amounts for innovator multiple source and noninnovator multiple source specified covered to payment drugs that were implemented by the January 6, 2004 interim final rule with comment period.

Table 26 lists the proposed payment
amounts for innovator and noninnovator multiple source drugs, biologicals, and radiopharmaceuticals effective January 1, 2005 to December

31, 2005.


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b. Proposal To Treat Three Sunsetting Pass-Through Drugs as Specified Covered Outpatient Drugs

As discussed in section V.A.2 of the preamble, there are 13 drugs and biologicals whose pass-through status will expire on December 31, 2004. Table 22 lists these drugs and biologicals.

Pass-through payment was made for 10 of these 13 items as of December 31, 2002. Therefore, these 10 items now qualify as specified covered outpatient drugs under section 1833(t)(14) of the Act, as added by section 621(a) of Pub.

L. 108

– 173, as described above. However, pass-through status for three of the pass-through drugs and biologicals that will expire on December 31, 2004 (C9121, Injection, argatroban; J9395, Fulvestrant; and J3315, Triptorelin pamoate), was first made effective on January 1, 2003. These items are specifically excluded from the
definition of ‘‘ specified covered outpatient drugs ’’ in section 1833(t)(14)(B)(ii) of the Act, because they are not drugs or biologicals for which pass-through payment was first made on or before December 31, 2002.
Pub. L. 108

– 173 does not address howto set payment for items whose passthrough status expires in CY 2005, but for which pass-through payment was not made as of December 31, 2002.

Therefore, we are proposing to pay for the three expiring pass-through items for which payment was first made on January 1, 2003 rather than on or before December 31, 2002 using the methodology described under section 1833(t)(14) of the Act for specified covered outpatient drugs. We believe that this methodology would allow us to determine appropriate payment amounts for these products in a manner that is consistent with how we pay fordrugs and biologicals whose passthrough status was effective as of December 31, 2002, and that does not penalize those products for receiving pass-through status on or after January 1, 2003. Table 27 below lists the CY 2005 OPPS payment rates that we are proposing for these three drugs and biologicals.

Of the 13 products for which we are proposing that pass-through status expire on December 31, 2004, we are proposing to package two of them (C9113, Inj. Pantoprazole sodium and J1335, Ertapenum sodium) because their median cost per day falls below the $50 packaging threshold. The remaining 11 drugs and biologicals were determined
to be sole source items and would be paid separately according to the payment methodology for sole source products described above.

We wish to note that darbepoetin alfa (Q0137) will be considered a specified covered outpatient drug in CY 2005. Payment for these drugs is governed under section 1833(t)(14) of the Act. Specifically, darbepoetin alfa will be paid as a sole-source drug at a rate between 83 and 95 percent of its
reference AWP. Given the status required under 1833(t)(14) of the Act, as added by section 621(a)(1) of Pub. L.

108

– 173, we specifically solicit comment on whether we should again apply an equitable adjustment, made pursuant to 1833(t)(2)(E) of the Act, to the price of this drug.


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c. Proposed CY 2005 Payment for New Drugs and Biologicals With HCPCS Codes and Without Pass-Through Application and Reference AWP

Pub. L. 108

– 173 does not address OPPS payment in CY 2005 for new drugs and biologicals that have assigned HCPCS codes, but that do not have a reference AWP or approval for payment as pass-through drugs or biologicals. Because there is no statutory provision that dictates payment for such drugs and biologicals in CY 2005, and because we have no hospital claims data to use in establishing a payment rate for them, we investigated other possible options to pay for these items in CY 2005. Clearly, one option is to continue packaging payment for these new drugs and biologicals that have their own
HCPCS codes until we accumulate
sufficient claims data to calculate
median costs for these items. Another option is to pay for them separately using a data source other than our claims data. The first option is consistent with the approach we have taken in prior years when claims data
for new services and items are not
available to calculate median costs. However, because these new drugs and biologicals may be expensive, we are concerned that packaging these new drugs and biologicals may jeopardize beneficiary access to them. In addition, we do not want to delay separate payment for a new drug or biological solely because a pass-through application was not submitted.

Therefore, in CY 2005, we are proposing to pay for these new drugsand biologicals which do not have passthrough status at a rate that is equivalent to the payment they would receive in the physician office setting, which will
be established in accordance with the methodology described in the CY 2005 Physician Fee Schedule proposed rule (69 FR 47488, 47520 through 47524). We note that this payment methodology is the same as the methodology that
would be used to calculate the OPPS payment amount that pass-through drugs and biologicals would be paid in
CY 2005 in accordance with section 1842(o) of the Act, as amended by section 303(b) of Pub. L. 108

– 173, and section 1847A of the Act. Thus, we would be treating new drugs and biologicals with established HCPCS codes the same, irrespective of whether pass-through status has been determined. We are also proposing to assign status indicator ‘‘ K ’’ to HCPCS codes for new drugs and biologicals forwhich we have not received a passthrough application.

In light of this proposal, we understand that manufacturers might be hesitant to apply for pass-through status. However, we do not believe there would be many instances in CY 2005when we would not receive a passthrough application for a new drug or biological that has a HCPCS code. To avoid delays in setting an appropriate payment amount for new drugs and biologicals and to expedite the processing of claims, we strongly encourage manufacturers to continue submitting pass-through applications for new drugs and biologicals when FDA approval for a new drug or biological is imminent to give us advance notice to begin working to create a HCPCS code and APC. The preliminary application would have to be augmented by FDA approval documents and final package
inserts once such materials becomeavailable. However, initiating the passthrough application process as early as possible would enable us to expedite coding and pricing for the new drugs and biologicals and accelerate the process for including them in the next available OPPS quarterly release.

We discuss in section V.D. of this preamble how we are proposing to pay in CY 2005 for new drugs and biologicals between their FDA approval date and assignment of a HCPCS code
and APC. We share the desire of providers and manufacturers to incorporate payment for new drugs and biological into the OPPS as expeditiously as possible to eliminate potential barriers to beneficiary access
and to minimize the number of claims that must be processed manually under the OPPS interim process for claims
without established HCPCS codes and APCs, and we solicit public comments on our proposal.

d. Proposed Payment for Separately Payable NonPass-Through Drugs and Biologicals

As discussed in section V.B.2. of this preamble, for CY 2005, we used CY
2003 claims data to calculate the proposed median cost per day for drugs, biologicals, and radiopharmaceuticals that have an assigned HCPCS code and are paid either as a packaged or separately payable item under the OPPS. Section 1833(t)(14) of the Act, as added by section 621(a) of Pub. L. 108

– 173, specified payment methodologies for most of these drugs, biologicals, and radiopharmaceuticals. However, this provision did not specify how payment was to be made for separately payable drugs and biologicals that never received pass-through status and that
are not otherwise addressed in section 1833(t)(14) of the Act. Some of the items for which such payment is not specified are (1) those that have been paid separately since implementation of the OPPS on August 1, 2000, but are not eligible for pass-through status, and (2) those that have historically been packaged with the procedure with which they are billed but, based on the CY 2003 claims data, their median cost per day is above the legislated $50 packaging threshold. Because Pub. L.

108

– 173 does not address how we are to pay for such drugs and biologicals (any drug or biological that falls into one or the other category and that has a per day cost greater than $50), we are proposing to set payment based on
median costs derived from the CY 2003 claims data. Because these products are generally older or low-cost items, or


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both, we believe that the proposed payments would allow us to provide adequate payment to hospitals for furnishing these items. Table 28. below lists the drugs and biologicals to which this proposed payment policy would apply.


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e. Proposed CY 2005 Change in Payment Status for HCPCS Code J7308

Since implementation of the OPPS on August 1, 2000, HCPCS code J7308 (Aminolevulinic acid HCI for topical administration, 20 percent single unit dosage form) has been treated as a packaged item and denoted as such using status indicator ‘‘ N ’’ . Thus, historically we have not allowed separate payment for this drug under the OPPS. In CY 2005, this drug would receive a separate payment under the Medicare physician fee schedule when furnished in a physician ’ s office. Therefore, as we generally intend to establish, wherever possible, consistent payment policies for drugs whether they are furnished in a hospital outpatient setting or in a physician ’ s office or clinic, we are proposing to also pay separately for J7308 when furnished in a hospital outpatient department. Thus, for CY 2005, we are proposing to pay for this drug at 106 percent of ASP, which is equivalent to the payment rate that it would receive under the physician fee schedule. The proposed CY 2005 ASP and payment under the OPPS for J7308 is $88.86. We are soliciting comments on our proposed payment methodology for HCPCS code J7308 for CY 2005.

C. Proposed Coding and Billing for Specified Outpatient Drugs
[If you choose to comment on issues in this section, include the caption ‘‘ Drug Coding and Billing ’’ at the beginning of your comment.]

As discussed in the January 6, 2004 interim final rule with comment period (69 FR 826), hospitals were instructed to bill for sole source drugs using the existing HCPCS code, which were priced in accordance with the provisions of newly added section 1833(t)(14)(A)(i) of the Act, as added by
Pub. L. 108

– 173. However, at that time, the existing HCPCS codes did not allow us to differentiate payment amounts for innovator multiple source and noninnovator multiple source forms of the drug. Therefore, effective April 1, 2004, we implemented new HCPCS codes via Program Transmittal 112 (Change Request 3144, February 27, 2004) and Program Transmittal 132 (Change Request 3154, March 30, 2004) that providers were instructed to use to bill for innovator multiple source drugs in order to receive appropriate payment
in accordance with section 1833(t)(14)(A)(i)(II) of the Act. Providers
were also instructed to continue to use
the current HCPCS codes to bill for noninnovator multiple source drugs to receive payment in accordance with section 1833(t)(14)(A)(i)(III). In this manner, drugs, biologicals, and radiopharmaceuticals will be appropriately coded to reflect their classification and be paid accordingly. We are proposing to continue this coding practice in CY 2005 with payment made in accordance with section 1833(t)(14)(A)(ii) of the Act.

D. Proposed Payment for New Drugs, Biologicals and Radiopharmaceuticals Before HCPCS Codes Are Assigned
[If you choose to comment on issues in this section, include the caption

‘‘ HCPCS Codes ’’ at the beginning of your comment.]

1. Background

Historically, hospitals have used a
code for an unlisted or unclassified drug, biological, or radiopharmaceutical or used an appropriate revenue code to bill for drugs, biologicals, and radiopharmaceuticals furnished in the outpatient department that do not have an assigned HCPCS code. The codes for not otherwise classified drugs, biologicals, and radiopharmaceuticals are assigned packaged status under the OPPS. That is, separate payment is not made for the code, but charges for the code would be eligible for an outlier payment and, in future updates, the charges for the code are packaged with the separately payable service with which the code is reported for the same
date of service.

Drugs and biologicals that are newly approved by the FDA and for which a HCPCS code has not yet been assigned by the National HCPCS Alpha-NumericWorkgroup could qualify for passthrough payment under the OPPS. An application must be submitted to CMS in order for a drug or biological to be assigned pass-through status, along with a temporary C-code for billing purposes,and an APC payment amount. Passthrough applications are reviewed on a flow basis, and payment for drugs and biologicals approved for pass-through status is implemented throughout the year as part of the quarterly updates of
the OPPS.

In the November 7, 2003 final rule with comment period (68 FR 63440), we explained how CMS generally pays under the OPPS for new drugs and biologicals that are assigned HCPCS codes, but that are not approved for pass-through payment, and for which CMS had no data upon which to base a payment rate. These codes do not receive separate payment, but are assigned packaged status. Hospitals were urged to report charges for the new codes even though separate payment is not provided. Charges reported for the
new codes are used to determine hospital costs and payment rates in future updates. For CY 2004, we again noted that drugs that were assigned a HCPCS code effective January 1, 2004, and that were assigned packaged status, remain packaged unless pass-throughstatus is approved for the drug. If passthrough status is approved for these drugs, pass-through payments are implemented prospectively in the next available quarterly release.

2. Provisions of Pub. L. 108

– 173

Section 621(a)(1) of Pub. L. 108

– 173 amended section 1833(t) of the Act by adding paragraph (15) to provide for payment for new drugs and biologicals until HCPCS codes are assigned under the OPPS. Under this provision, we are required to make payment for an outpatient drug or biological that is furnished as part of covered OPD
services for which a HCPCS code has not been assigned in an amount equal to 95 percent of AWP. This provision applies only to payments under the OPPS, effective January 1, 2004. However, we did not implement this provision in the January 6, 2004 interim final rule with comment period because
we had not determined at that time how hospitals would be able to bill Medicare and receive payment for a drug or biological that did not have an identifying HCPCS code.

As stated earlier, at its February 2004 meeting, the APC Panel heard presentations suggesting how to make payment for a drug or biological that did
not have a code. The APC Panel recommended that we work swiftly to implement a methodology to enable hospitals to file claims and receive payment for drugs that are newly approved by the FDA. The APC Panel
further recommended that we consider using temporary or placeholder codes that could be quickly assigned following FDA approval of a drug or biological to facilitate timely payment for new drugs and biologicals.

We have explored a number of options to make operational the provisions of section 1833(t)(15) of the Act, as added by section 621(a)(1) of
Pub. L. 108

– 173, as soon as possible. One of the approaches that we
considered was to establish a set of placeholder codes in the Outpatient Code Editor (OCE) and the PPS pricing software for the hospital OPPS (PRICER) that we would instruct hospitals to use when a new drug was approved. Hospitals would be able to submit claims using the new code but would receive no payment until the next quarterly update. By that time, we would have installed an actual payment amount and descriptor for the code into


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the PRICER, and would mass-adjust
claims submitted between the date of FDA approval and the date of installation of the quarterly release. A second option that we considered was to implement an APC, a C-code, and a payment amount as part of the first quarterly update following notice of FDA approval of a drug or biological. Hospitals would hold claims for the new drug or biological until the quarterly release was implemented and then submit all claims for the drug orbiological for payment using the new Ccode to receive payment on a retroactive basis. We also considered instructing hospitals to bill for a new drug or biological using a ‘‘ not otherwise
classified ’’ code for which they would receive an interim payment based on charges converted to cost. Final payment would then be reconciled at cost report settlement. While each of these approaches might enable hospitals to begin billing for a newly approved drug or biological as soon as it received FDA approval, each approach had significant operational disadvantages, such as increased burden on hospitals or payment delays, or the risk of significant overpayments or underpayments that could not be resolved until cost report settlement.

We adopted an interim approach that
we believe balances the need for hospitals to receive timely and accurate payment as soon as a drug or biological is approved by the FDA with minimal disruption of the OPPS claims processing modules that support the payment of claims. On May 28, 2004 (Transmittal 188, Change Request 3287), we instructed hospitals to bill for a drug or biological that is newly approved by the FDA by reporting the National Drug Code (NDC) for the product along with a new HCPCS code C9399, Unclassified drug or biological. When C9399 appears on a claim, the OCE suspends the claim for manual pricing by the fiscal intermediary. The fiscal intermediary prices the claim at 95 percent of its AWP using Red Book or an equivalent recognized compendium, and processes the claim for payment. This approach enables hospitals to bill and receive payment for a new drug or biological concurrent with its approval by the FDA. The hospital does not have to wait for the next quarterly release or for approval of a product-specific HCPCS to receive payment for a newly approved drug or biological or to resubmit claims for adjustment. Hospitals would discontinue billing C9399 and the NDC upon implementation of a HCPCS code, status indicator, and appropriate payment amount with the next quarterly update. In this proposed rule, we are proposing to formalize this methodology for CY 2005 and to expand it to include payment for new radiopharmaceuticals to which a HCPCS code is not assigned (see section V.G. of this preamble). We are soliciting comments on the methodology and are particularly interested in the reaction of hospitals to using this approach to bill and receive timely payment under the OPPS for drugs, biologicals, and radiopharmaceuticals that are newly approved by the FDA, prior to assignment of a product-specific HCPCS
code.

E. Proposed Payment for Vaccines

[If you choose to comment on issues in this section, include the caption

‘‘ Vaccines ’’ at the beginning of your comment.]

Outpatient hospital departments administer large amounts of the vaccines for influenza (flu) and pneumococcal pneumonia (PPV), typically by participating in immunization programs. In recent years, the availability and cost of some vaccines (particularly the flu vaccine) have fluctuated considerably. As discussed in the November 1, 2002 final rule (67 FR 66718), we were advised by providers that OPPS payment was
insufficient to cover the costs of the flu
vaccine and that access of Medicare beneficiaries to flu vaccines might be limited. They cited the timing of updates to OPPS rates as a major concern. They indicated that our update methodology, which uses 2-year-old claims data to recalibrate payment rates,
would never be able to take into account yearly fluctuations in the cost of the flu vaccine. We agreed with this concern and decided to pay hospitals for influenza and pneumococcal pneumonia vaccines based on a reasonable cost methodology. As a result of this change, hospitals, home health agencies (HHAs), and hospices, which were paid for these vaccines under the OPPS in CY 2002, have been receiving payment at reasonable cost for
these vaccines since CY 2003. We are
aware that access concerns continue to exist for these vaccines. However, we continue to believe that payment other
than on a reasonable cost basis would exacerbate existing access problems. Therefore, we are proposing to continue paying for influenza and pneumococcal pneumonia vaccines under the reasonable cost methodology in CY

2005. F. Proposed Changes in Payment for Single Indication Orphan Drugs
[If you choose to comment on issues in this section, include the caption

‘‘ Orphan Drugs ’’ at the beginning of your comment.]

Section 1833(t)(1)((B)(i) of the Act gives the Secretary the authority to designate the hospital outpatient services to be covered. The Secretary has specified coverage for certain drugs as orphan drugs (section 1833(t)(14)(B)(ii)(III) of the Act as added by section 621(a)(1) of Pub. L. 108

– 173). Section 1833(t)(14)(C) of the Act as added by section 621(a)(1) of Pub. L.

108

– 173, gives the Secretary the authority in CYs 2004 and 2005 to specify the amount of payment for an orphan drug that has been designated as such by the Secretary.

We recognize that orphan drugs that are used solely for an orphan condition or conditions are generally expensive and, by definition, are rarely used. We believe that if the cost of these drugs were packaged into the payment for an associated procedure or visit, the payment for the procedure might be insufficient to compensate a hospital for the typically high cost of this special type of drug. Therefore, we are proposing to continue making separate payments for orphan drugs based on their currently assigned APCs.

In the November 1, 2002 final rule (67 FR 66772), we identified 11 single indication orphan drugs that are used solely for orphan conditions by applying the following criteria:

• The drug is designated as an orphan drug by the FDA and approved by the FDA for treatment of only one or more orphan conditions(s).

• The current United States Pharmacopoeia Drug Information (USPDI) shows that the drug has neither an approved use nor an off-label use for other than the orphan condition(s).

Eleven single indication orphan drugs were identified as having met these criteria and payments for these drugs
were made outside of the OPPS on a
reasonable cost basis.

In the November 7, 2003 final rule with comment period (68 FR 63452), we discontinued payment for orphan drugs
on a reasonable cost basis and made separate payments for single indication orphan drugs. Payments for the orphan drugs were made at 88 percent of the AWP listed for these drugs in the April 1, 2003 single drug pricer, unless we were presented with verifiable
information that shows that our payment rate does not reflect the price that is widely available to the hospital market. For CY 2004, Ceredase


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(alglucerase) and Cerezyme (imiglucerase) were paid at 94 percent
of AWP because external data submitted by commenters on the August 12, 2003 proposed rule caused us to believe that payment at 88 percent of AWP would be
insufficient to ensure beneficiaries ’ access to these drugs.

In the December 31, 2003 correction of the November 7, 2003 final rule with comment period (68 FR 75442), we added HCPCS code J9017, arsenic trioxide (per unit) to our list of single indication orphan drugs. To date, the following are the 12 orphan drugs that we have identified as meeting our criteria: J0205 Injection, alglucerase, per 10 units; J0256 Injection, alpha 1- proteinase inhibitor, 10 mg; J9300 Gemtuzumab ozogamicin, 5 mg; J1785 Injection, imiglucerase, per unit; J2355 Injection, oprelvekin, 5 mg; J3240 Injection, thyrotropin alpha, 0.9 mg; J7513 Daclizumab parenteral, 25 mg; J9015 Aldesleukin, per vial; J9017 Arsenic trioxide, per unit; J9160 Denileukin diftitox, 300 mcg; J9216 Interferon, gamma 1-b, 3 million units and Q2019 Injection, basiliximab, 20 mg. We are not proposing any changes to this list of orphan drugs for CY 2005.

If we had not classified these drugs as single indication orphan drugs for payment under the OPPS, they would have met the definition and been paid as single source specified covered outpatient drugs, resulting in lower payments which could impede beneficiary access to these unique drugs
dedicated to the treatment of rate diseases. Instead, for CY 2005, under our authority at section 1833(t)(14)(C) of the Act, we are proposing to pay for all 12 single indication orphan drugs, including Ceredase and Cerezyme, at the rate of 88 percent of AWP or 106 percent of the ASP, whichever is higher. However, for drugs where 106 percent of ASP would exceed 95 percent of AWP, payment would be capped at 95 percent of AWP, which is the upper limit allowed for sole source specific covered outpatient drugs. For example, Ceredase and Cerezyme would each be paid at 95 percent of the AWP because payment at 106 percent of the ASP for these two drugs not only exceeds 88 percent of the AWP but also exceeds 95 percent of the AWP. We are proposing to pay the higher of 88 percent of AWP or 106 percent of ASP capped at 95 percent of AWP to ensure that
beneficiaries will continue to have access to such important drugs.

G. Proposal To Change Payment Policy for Radiopharmaceuticals
[If you choose to comment on issues in this section, include the caption ‘‘ Radiopharmaceuticals ’’ at the beginning of your comment.]

In the November 1, 2002 OPPS final rule (67 FR 66757), we determined that we would classify any product containing a therapeutic radioisotope to be in the category of benefits described under section 1861(s)(4) of the Act. We also determined that the appropriate benefit category for diagnostic radiopharmaceuticals is section 1861(s)(3) of the Act. We stated in the November 1, 2002 final rule that we will consider neither diagnostic nor therapeutic radiopharmaceuticals to be drugs as defined in 1861(t) of the Act (67 FR 66757). Therefore, beginning with the CY 2003 OPPS update, and continuing with the CY 2004 OPPS update, we have not qualified diagnostic or therapeutic radiopharmaceuticals as drugs or biologicals.

When we analyzed the many changes mandated by Pub. L. 108

– 173 that affect how we would pay for drugs, biologicals, and radiopharmaceuticals under the OPPS in CY 2005, we
revisited the decision that we implemented in CY 2003 not to classify diagnostic and therapeutic radiopharmaceuticals as drugs or biologicals. In our analysis, we noted that although we did not consider radiopharmaceuticals for pass-through payment in CYs 2003 and 2004, we did apply to radiopharmaceuticals the same packaging threshold policy that we applied to other drugs and biologicals, and which we are proposing to continue in CY 2005. In addition, for the CY 2004 OPPS update, we applied the same adjustments to median costs for radiopharmaceuticals that we applied to separately payable drugs and biologicals that did not have pass-through status (68 FR 63441).

In our review of this policy, we noted that section 1833(t)(14)(B)(i) of the Act, as amended by section 621(a) of Pub. L.

108

– 173, does include

‘‘ radiopharmaceutical ’’ within the meaning of the term ‘‘ specified covered outpatient drugs, ’’ although neither section 621(a)(2) nor section 621(a)(3) of
Pub. L. 108

– 173 includes a reference to radiopharmaceuticals.

In an effort to provide a consistent reading and application of the statute, we are proposing to apply to radiopharmaceuticals certain provisions
in section 621 of Pub. L. 108

– 173 which affect payment for drugs and biologicals billed by hospitals for payment under
the OPPS. We believe it is reasonable to include radiopharmaceuticals in the general category of drugs in light of their inclusion as specified covered outpatient drugs in section 1833(t)(14)(B) of the Act, as added by section 621(a)(1) of Pub. L. 108

– 173.

Section 621(a)(1) of Pub. L. 108

– 173, which amends section 1833(t) of the Act by adding a new subparagraph (14) affecting payment for radiopharmaceuticals under the OPPS, is unambiguous. This provision clearly requires that separately paid radiopharmaceuticals be classified as

‘‘ specified covered outpatient drugs. ’’ Therefore, in CY 2005, we propose to continue to set payment for radiopharmaceuticals in accordance with these requirements, which are
discussed in detail in section V.B.3. of this preamble.

Section 1833(t)(16)(B) of the Act, as added by section 621(a)(2) of Pub. L.

108

– 173, requires us to reduce the
threshold for the establishment of separate APCs with respect to drugs and biologicals to $50 per administration for drugs and biologicals furnished in 2005 and 2006. We are proposing to apply the $50 packaging threshold methodology
discussed in section V.B.2. of this preamble to radiopharmaceuticals as well as to drugs and biologicals.

Section 1833(t)(15) of the Act, added by section 621(a)(1) of Pub. L. 108

– 173, requires us to make payment equal to 95 percent of the AWP for an outpatient drug or biological that is covered and furnished as part of covered OPD
services for which a HCPCS code has not been assigned. We propose, beginning in CY 2005, to extend to radiopharmaceuticals the same payment methodology proposed in section V.D. of this preamble for new drugs and biologicals before HCPCS codes are assigned. That is, we are proposing to pay for newly approved radiopharmaceuticals, as well as newly approved drugs and biologicals, at 95 percent of AWP prior to assignment of
a HCPCS code.

Section 1833(t)(5)(E) of the Act, as added by section 621(a)(3) of Pub. L.

108

– 173, excludes separate drug and biological APCs from outlier payments. Beginning in CY 2005, we are proposing to apply section 621(a)(3) of Pub. L.

108

– 173 to APCs for radiopharmaceuticals. That is, beginning in CY 2005, radiopharmaceuticals would be excluded from receiving outlier payments.

Consistent with our proposal to apply to radiopharmaceutical agents payment policies that apply to drugs and biologicals, we further propose, beginning in CY 2005, to accept applications for pass-through status for certain radiopharmaceuticals. That is, we propose on a prospective basis to consider for pass-through status those


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radiopharmaceuticals to which a HCPCS code is first assigned on or after January 1, 2005. As we explain in section V.A.3. above, section 1833(t)(6)(D)(i) of the Act sets the payment rate for pass-through eligible drugs and biologicals as the
amount determined under section 1842(o) of the Act. We propose in section V.A.3. to pay for drugs and biologicals with pass-through status in CY 2005 consistent with the provisions of section 1842(o) of the Act as amended by Pub. L. 108

– 173, at a rate that is equivalent to the payment these drugs and biologicals would receive in the physician office setting and set in accordance with the methodology described in the Medicare Physician Fee Schedule Proposed Rule for CY 2005 (69 FR 47488, 47520 through 47524).

We issued an interim final rule with comment period entitled ‘‘ Medicare Program: Manufacturer Submission of
Manufacturer ’ s Average Sales Price (ASP) Data for Medicare Part B Drugs and Biologicals ’’ in the April 6, 2004 Federal Register , related to the
calculation and submission of
manufacturer ’ s ASP data (69 FR 17935).
We need these data in order to determine payment for drugs and biologicals furnished in a physician office setting in accordance with the methodology described in the Medicare Physician Fee Schedule Proposed Rule (69 FR 47488, 47520 through 47524). However, the April 6, 2004 interim final rule with comment period excludes radiopharmaceuticals from the data reporting requirements that apply to Medicare Part B covered drugs and biologicals paid under sections 1842(o)(1)(D), 1847A, or 1881(b)(13)(A)(ii) of the Act (69 FR 17935). As a consequence, we would not have the same type of data available to determine payment for a newradiopharmaceutical approved for passthrough status after January 1, 2005 that
would be available to determine payment for a new drug or biological with pass-through status in CY 2005.

Therefore, in order to set payment for a new radiopharmaceutical approved for pass-through status in accordance with 1842(o) and in a manner that is consistent with how we propose to set payment for a pass-through drug or biological, we are proposing a methodology that would apply solely to new radiopharmaceuticals for which payment would be made under the OPPS and for which an application for pass-through status is submitted after January 1, 2005. That is, in order to receive pass-through payment for a new radiopharmaceutical under the OPPS, a manufacturer would be required to
submit data and certification for the radiopharmaceutical in accordance with the requirements that apply to drugs and biologicals under section 303 of
Pub. L. 108

– 173 as set forth in the interim final rule with comment period issued in the April 6, 2004 Federal Register (66 FR 17935) and described on
the CMS website at cms.hhs.gov. Payment would be determined in accordance with the methodology applicable to drugs and biologicals that
is discussed in the CY 2005 Medicare Physician Fee Schedule proposed rule (69 FR 47488, 47520

– 47524). In theevent the manufacturer seeking passthrough status for a radiopharmaceutical
does not submit data in accordance with the requirements specified for new drugs and biologicals, we propose to set payment for the new radiopharmaceutical as a specified covered outpatient drug, under section 1833(t)(14)(A) as added by section 621(a)(1) of Pub. L. 108

– 173.
H. Proposed Coding and Payment for Drug Administration

[If you choose to comment on issues in this section, include the caption ‘‘ Drug Administration ’’ at the beginning of your comment.]

Since implementation of the OPPS, Medicare OPPS payment for administration of cancer chemotherapy drugs and infusion of other drugs has been made using the following HCPCS
codes:

• Q0081, Infusion therapy other than chemotherapy, per visit

• Q0083, Administration of chemotherapy by any route other than infusion, per visit

• Q0084, Administration of chemotherapy by infusion only, per

visit

• Q0085, Administration of chemotherapy by both infusion and another route, per visit

In the CY 2004 proposed rule, we proposed to change coding and payment for these services to enable us to pay more accurately for the wide range of services and the drugs that we package into these per visit codes. (See August 12, 2003 proposed rule (68 FR 47998) for background discussion on these codes.) Commenters on the CY 2004 proposed rule recommended that we use the CPT codes for drug
administration. One commenter provided a crosswalk from the CPT codes for drug administration to the Q
codes that we could use in a transition. We did not implement this in the final
rule for CY 2004 OPPS but indicated
that we would consider it for CY 2005
and would discuss it with the APC Panel at its February 2004 meeting. Commenters and the APC Panel
recommended that we discontinue use of code Q0085 for CY 2004 because codes Q0083 and Q0084 could be used together to report the services described by code Q0085. We did implement this change for CY 2004 and made code Q0085 nonpayable for CY 2004 OPPS.

At the APC Panel meeting, we presented a proposal from an outside organization that matched CPT codes for chemotherapy and nonchemotherapy infusions to the Q codes currently used to pay for these services under the
OPPS. We asked the APC Panel for their perspective on the potential benefit of using the proposed coding approach as the basis for billing and determining OPPS payment for administering these drugs. The APC Panel recommended
that CMS continue to review the organization ’ s proposed coding crosswalk with the goal of using it to transition from the use of Q codes to
that of CPT codes to bill for administration of these drugs.

For CY 2005, we are proposing to use the CPT codes for drug administration
but to crosswalk the CPT codes into
APCs that reflect how the services would have been paid under the Q codes. Although hospitals would bill the CPT codes and include the charges for each CPT code on the claim, payment would be made on a per visit basis, using the cost data from the per visit Q codes (Q0081, Q0083 and Q0084) to set the payment rate for CY
2005. See Table 29. for the crosswalk of CPT codes into APCs based on the Q codes. The only change from the crosswalk that was submitted by the outside organization is that we are proposing a Q code and APC crosswalk for CPT code 96549 (Unlisted chemotherapy procedure), rather than bundling that service. We believe that Q0083 is the code that would have previously been reported by hospitals to
describe the unlisted service. In addition, this would place the unlisted
service in our lowest resource utilization APC for chemotherapy, consistent with our policy for other
unlisted services.

We are proposing to establish the Q
code and APC crosswalk for CPT code 96549 because there is no CPT specific charge or frequency data on which to set payments. The CY 2005 OPPS is based
on CY 2003 claims data which used the Q codes. Therefore, the only cost data
available to us for establishment of median costs is the data based on the Q codes for drug administration. Moreover, the only frequency data that are available for use in calculating the scaler for budget neutrality of payment weights are the frequency data for the Q


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codes. Therefore, the payments set for
the CPT codes must use the cost data for the Q codes and must result in the same payments that would have been made had the Q codes been continued.

Under this proposed methodology, hospitals would report the services they
furnish with the CPT codes and would show the charges that they assign to the
CPT codes on the claim. The Medicare OCE would assign the code to an APC whose payment is based on the per visit Q code that would have been used absent coding under CPT. In most cases, the OCE would collapse multiple codes or multiple units of the same CPT code into a single unit to be paid a single APC amount. This approach is needed because the data for the Q codes is reported on a per visit basis and more
than one unit of a CPT code can be provided in a visit.

For example, CPT code 96410 (Chemotherapy administration infusion technique, up to 1 hour) is for infusion of chemotherapy drugs for the first hour,
and CPT code 96412 is for chemotherapy infusion up to 8 hours,
each additional hour. The claims data used to set the APC payment rate for these codes is for a per visit amount (taken from CY 2003 data for Q0084 a per visit code). The frequency data on the claim are also on a per visit basis. For CY 2005, we are proposing that CPT code 96410 would be paid one unit of APC 0117 (to which CPT code 96410 would be crosswalked) and no separate payment would be made for CPT code 96412, regardless of whether one unit or
more than one unit is billed. CPT code 96412 would be a packaged code for CY 2005. Under the Q code data on which the payment weight for APC 0117 is based, the per visit amount would represent a payment that is appropriate for all drug administration services in a visit (that is, one unit of CPT code 96410 and as many units of CPT code
96412 as were furnished in the same visit).

Similarly, when a hospital bills 3 units of 96400 (Chemotherapy administration, subcutaneous or intramuscular, with or without local anesthesia), the OCE would assign one unit of APC 0116 for that code. (APC
0116 is the APC to which CPT code 96400 would be crosswalked.) The payment would be based on Q0083, a per visit code, because, absent the ability to be paid based on CPT codes, the hospital would have billed one unit of Q0083 (for the 3 injections) had we not discontinued the Q codes for CY
2005. The OCE would assume that there was one and only one visit in which there were 3 injections and would pay accordingly (that is, one unit of APC 0116).

If we adopt the CPT codes for drug
administration to ensure accurate payment in the future, it would be critical for hospitals to bill the charges for the packaged CPT codes for drug administration for CY 2005 (that is, the CPT codes with SI=N), even though there would be no separate payment for them in CY 2005. For CY 2007 OPPS,
CY 2005 claims data would be used as the basis for setting median costs for each CPT code, based on the reported charges reduced to cost, and would determine what APC configuration ensures most appropriate payment for the CPT drug administration codes. If hospitals do not bill charges in CY 2005 for the packaged drug administration CPT codes such as CPT codes 96412, 96423, 96545, or 90781, they would jeopardize our ability to make accurate payments for services billed and paid
under these codes in CY 2007 when we use the CY 2005 data to set the payment weights.

**BILLING CODE 4120**

**– 01** 

**– P** 


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I. Proposed Payment for Blood and
Blood Products

[If you choose to comment on issues in this section, include the caption ‘‘ Blood
and Blood Products ’’ at the beginning of your comments.]

Since the OPPS was first implemented in August 2000, separate payment has been made for blood and blood products in APCs rather than packaging them into payment for the procedures with which they were administered. We recognize that blood
is a valuable health care resource used regularly in a broad range of hospital procedures and the availability of safe blood is essential to the delivery of high quality health care services to Medicare
beneficiaries.

In CY 2000, payment for blood was
established based on external data provided by commenters due to limited
Medicare claims data. From CY 2000 to CY 2002, payment rates were updated for inflation. For CY 2003, as described in the November 1, 2002 final rule (67 FR 66773), we applied a special dampening methodology to blood and blood products that had significant reductions in payment rates from CY 2002 to CY 2003. Using the dampening methodology, we limited the decrease in


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payment rates for blood and blood products to approximately 15 percent. For CY 2004, as recommended by the APC Panel, we froze payment rates for blood and blood products at CY 2003
levels. This allowed us to undertake further study of the issues raised by past commenters and presenters at the August 2003 and February APC 2004 Panel meetings.

For CY 2005, we are proposing to continue to pay separately for blood and blood products. We also are proposing
to establish new APCs that would allow each blood product to be in its own separate APC. In addition, after review,
we determined that several of the blood product APCs contained multiple blood products with no clinical homogeneity or whose product-specific median costs may not have been similar. Thus, we are also proposing to reassign some of these HCPCS already contained in certain APCs to new APCs. Table 30 below lists, by HCPCS code, our proposed CY 2005 APC reassignments for such blood and blood products.


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### 50524 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

Administrative costs for the processing and storage specific to the transfused blood product are included in the APC payment, which is based on hospitals ’ charges. Payment for the collection, processing, and storage of autologous blood, as described by CPT
86890 and used in transfusion is made through APC 347 (Level III Transfusion Laboratory Procedures).

Other than for autologous blood products, the costs for collection, processing, storage, wastage, and other administrative costs for blood products that are not transfused are reported in the appropriate cost centers on hospitals ’ cost reports. These reported
costs are attributable to overhead and distributed across all hospital services linked to those cost centers through the standard process of converting charges to costs using hospitals ’ CCRs for each cost center on the cost report.

The DHHS Advisory Committee on Blood Safety and Availability has
recommended that CMS establish payment rates for blood and blood products based on current year acquisition costs and actual total costs of providing such blood products. At the February 2004 APC Panel meeting,
the APC Panel recommended that CMS
use external data to derive costs of blood and blood products in order to establish payment rates.

As with all services, we prefer to rely on our claims data whenever possible. We conducted a thorough analysis of billing for blood in CY 2003 claims data. Comments received for previous rules suggest that current hospital blood costs are not captured because hospitals underreport blood on their claims. Commenters explained that hospitals sometimes found it too costly to bill for blood. However, we found that 81 percent of all hospitals included in our ratesetting and modeling billed at least one blood and blood product in CY 2003. Of these hospitals, only 47 percent reported separate costs and charges in the two cost centers specific
to blood on their most recent annual cost report. It may be that those hospitals billing for blood but not reporting costs and charges on their costreport for either of the two bloodspecific cost centers report their blood costs and charges under other cost centers, such as operating room.

We have also received comments that the CCRs that we use to adjust claim charges to costs for blood are too low,
which results in an underestimation of
the true cost of blood and blood products. Our current methodology for matching cost center CCRs to revenue
codes includes a default to the overall CCR when any given provider has chosen not to report costs and charges for a specific cost center. After matching the two blood-specific cost centers to the 38X and 39X revenue codes, we observed a significant difference in CCRs for those hospitals with and without blood-specific cost centers. The median CCR for those hospitals with a blood-specific cost center was 0.66 for
revenue code 38X and 0.64 for revenue code 39X, and for those defaulting to the overall CCR, the result was a CCR of
0.34 for revenue code 38X and 0.33 for
revenue code 39X. The median overall CCR for all hospitals in the 2005 analysis was 0.33.

As noted above, about half of the hospitals (47 percent) reported at least one of the blood-specific cost centers on their most recent cost report. We then looked at the CY 2003 claims being used
to set CY 2005 median costs and discovered that about one-quarter relied
on a CCR that was based on a bloodspecific cost center to adjust charges to costs, and about three-quarters did not. This pattern existed even though almost all hospitals were billing blood in the
38X and 39X revenue codes. The result was the default CCR was used to adjust almost 75 percent of the line-items used
to set the median costs for blood and blood products.

In light of this information, we simulated a blood-specific CCR for those hospitals now defaulting to the overall CCR. We assumed that those hospitals not reporting costs and charges in a blood-specific cost center on their annual cost report, in general, face similar costs and engage in comparable charging practices for blood as those reporting a blood-specific cost center. For each hospital reporting costs and charges for the blood cost centers on their cost report, we calculated the ratio of the CCR in the blood-specific cost
center to the overall CCR. We then calculated the geometric mean of this
ratio. This was 2.2 for revenue code 38X


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and 2.1 for revenue code 39X. For each hospital not reporting costs and charges
for the blood cost centers on their cost report, we applied this mean ratio to
their overall CCR. We believe that this approach better responds to a missing blood-specific CCR than simply using the average blood-specific CCR for each
revenue code because it takes into account the unique charging structure of each provider. We then adjusted charges to costs for all hospitals and calculated a median cost for all blood products. Overall, this methodology increased the estimated median costs by 25 percent
for CY 2005 relative to the medians used to set CY 2004 rates. For example, the estimated median for P9016 (Red blood cells, leukocytes reduced), the most frequently billed blood product, increased by 32 percent relative to the
CY 2004 median. In reviewing the simulated medians
created above relative to those medians used to set CY 2004 payment rates, we noticed that procedures relying on a low volume of blood units (<1,000) demonstrated large decreases. Overall,
the simulated median costs for lowvolume blood products declined by 14 percent for CY 2005. Because a small sample size can lead to great variability in point estimates, we sought to increase the number of units of blood by combining CY 2002 and CY 2003 claims data for the low-volume products. We
used the simulated CCRs to calculate costs from charges. We recognize that
not all of the low-volume blood products had claims in CY 2002. Listed in Table 31 are the low volume products
for which we combined CY 2002 and
2003 claims. To ensure that we combined comparable costs, we updated
the simulated costs on the claims in CY 2002 to the base year of 2003 using the Producer Price Index (PPI) for blood and derivatives for human use (Commodity Code #063711), which is the PPI used to update blood and blood product prices in the market basket (67 FR 50039, August 1, 2002). We estimated the
annual PPI from December 2002 to
December 2003 to be

¥ 12.2 percent. Although a decline in PPI is unusual, we understand that the price of plasma products have recently declined. Further, the majority of the low-volume items are plasma products. After combining the 2 years of claims, we
were able to raise the volume of blood units billed for 5 of these products above 1,000. Ultimately, overall
estimated median costs continue to increase by 25 percent for all products,but decline by 16 percent for the lowvolume products.

After discussions with industry representatives and hospitals and
careful consideration of our claims analyses, for CY 2005 we are proposing to set payment rates for all blood and blood products listed in Table 29 based on our CY 2003 claims data, utilizing anactual or simulated hospital bloodspecific CCR to convert charges to costs for blood and blood products. For those low-volume products listed in Table 30,
we would combine claims data for CYs
2002 and 2003. We are confident that
we have claims data from the vast majority of the OPPS hospitals for blood products, and the tight distribution of costs for individual products, including low-volume products, provides no evidence of significant coding problems. In general, as a blood product undergoes increasing levels of processing or selection, our CY 2005 proposed payment for the product would increase
commensurate with the additional
resources utilized. We believe that the proposed payment methodology
described above will enable us to use our historical hospital claims data to assure the adequate payment for blood and blood products essential to continued Medicare beneficiary access to blood and blood products. In addition, we recognize the need to clarify billing regarding a variety of
blood-related services under the OPPS in response to numerous questions and
comments we have received. We intend to provide further billing guidelines to clarify our original Program Transmittal

A

– 01

– 50 issued on April 12, 2001 (CR Request 1585) regarding correct billing
for blood-related services in the near
future.

VI. Estimated Transitional PassThrough Spending in CY 2005 for Drugs, Biologicals, and Devices

[If you choose to comment on issues in this section, please include the caption

‘‘ Estimated Transitional Pass-Through Spending ’’ at the beginning of your comment.]

A. Basis for Pro Rata Reduction

Section 1833(t)(6)(E) of the Act limits the total projected amount of transitional pass-through payments for a


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given year to an ‘‘ applicable percentage ’’ of projected total Medicare and beneficiary payments under the hospital OPPS. For a year before CY 2004, the applicable percentage is 2.5 percent; for CY 2004 and subsequent years, we specify the applicable percentage up to 2.0 percent.

If we estimate before the beginning of the calendar year that the total amount of pass-through payments in that year would exceed the applicable percentage, section 1833(t)(6)(E)(iii) of the Act requires a prospective uniform
reduction in the amount of each of the transitional pass-through payments made in that year to ensure that the
limit is not exceeded. We make an estimate of pass-through spending to determine not only whether payments exceed the applicable percentage but also to determine the appropriate
reduction to the conversion factor.

For devices, making an estimate of pass-through spending in CY 2005 entails estimating spending for two groups of items. The first group consists
of those items for which we have claims data for procedures that we believe useddevices which were eligible for passthrough status in CY 2003 and CY 2004 and that would continue to be eligible for pass-through payment in CY 2005. The second group consists of those items for which we have no direct claims data, that is, items that became, or would become, eligible in CY 2004 and would retain pass-through status in CY 2005, as well as items that would be newly eligible for pass-through payment beginning in CY 2005.

B. Proposed Estimate of Pass-Through Spending for CY 2005

We are proposing to set the applicable percentage cap at 2.0 percent of the total OPPS projected payments for CY 2005. To estimate CY 2005 pass-through spending for device categories in the first group described above, we are proposing to use volume information
from CY 2003 claims data forprocedures associated with a passthrough device and manufacturer ’ s priceinformation from applications for passthrough status. This information would be projected forward to CY 2005 levels, using inflation and utilization factors based on total growth in Medicare Part B as projected by the CMS Office of the Actuary (OACT).

To estimate CY 2005 pass-through spending for device categories included in the second group, that is, items for which we have no direct claims data, we are proposing to use the following approach: For categories with no claims
data in CY 2003 that would be active in CY 2005, we would follow the methodology described in the November 2, 2001 final rule (66 FR 55857). That is, we are proposing to use price
information from manufacturers and
volume estimates based on claims for procedures that would most likely use the devices in question. This information would be projected forward to CY 2005 using the inflation and utilization factors supplied by the CMS OACT to estimate CY 2005 pass-through spending for this group of device categories. For categories that become eligible in CY 2005, we would use the same methodology. We anticipate that any new categories for January 1, 2005,
would be announced after the publication of this proposed rule but before the publication of the final rule. Therefore, the estimate of pass-throughspending would incorporate passthrough spending for categories made effective January 1, 2005.

With respect to CY 2005 pass-through spending for drugs and biologicals, as we explain in section V.A.3. of this proposed rule, the pass-through payment amount for new drugs andbiologicals that we determine have passthrough status would equal zero.Therefore, our estimate of total passthrough spending for drugs and biologicals with pass-through status in CY 2005 would equal zero.

In accordance with the methodology described above, we estimate that total pass-through spending in CY 2005 would equal approximately $30.8 million, which represents 0.13 percent of total OPPS projected payments for CY 2005. This figure includes estimates for the current device categories continuing into CY 2005, in addition to projections for categories that first become eligible
in CY 2005. This estimate is significantly lower than previous year ’ s estimates because of the method we are proposing in section V.A.3 of this preamble for determining the amount of pass-through payment for drugs and biologicals with pass-through status in

CY 2005.

In section V.G., we are proposing to accept pass-through applications for new radiopharmaceuticals that are


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assigned a HCPCS code on or after January 1, 2005. The pass-through amount for new radiopharmaceuticals approved for pass-through status in CY
2005 would be the difference between the OPD payment for the radiopharmaceutical, that is, the payment amount determined for the radiopharmaceutical as a sole source specified covered drug, and the payment amount for the radiopharmaceutical under section 1842(o) of the Act. However, we have no information identifying new radiopharmaceuticals to which a HCPCS code might be assigned after January 1, 2005 for which pass-through status would be sought. We also have no data regarding payment for new radiopharmaceuticals with pass-through status under the methodology that we propose in section V.G. However, we do not believe that pass-through spending for new radiopharmaceuticals in CY 2005 would be significant enough to materially affect our estimate of total pass-through spending in CY 2005. Therefore, we are not including radiopharmaceuticals in our estimate of pass-through spending in CY 2005.

Because we estimate pass-through spending in CY 2005 would amount to 0.13 percent of total projected OPPS CY 2005 spending, we are proposing to return 1.87 percent of the pass-through pool to adjust the conversion factor, as
we discuss in section VIII of this preamble.

VII. Other Policy Decisions and Proposed Policy Changes

A. Statewide Average Default Cost-toCharge Ratios
[If you choose to comment on issues in this section, include the caption ‘‘ Costto-Charge Ratios ’’ at the beginning of your comment.]

CMS uses cost-to-charge ratios (CCRs) to determine outlier payments, payments for pass-through devices, and monthly interim transitional corridor payments under the OPPS. Some hospitals do not have a valid CCR. These hospitals include, but are not limited to, hospitals that are new and have not yet submitted a cost report, hospitals that have a CCR that falls outside predetermined floor and ceiling thresholds for a valid CCR, or hospitalsthat have recently given up their allinclusive rate status. When OPPS was first implemented in CY 2000, we used CY 1996 and CY 1997 cost reports to
calculate default urban and rural CCRs for each State to use in determining the reasonable cost-based payments for those hospitals without a valid CCR (Program Memorandum A

– 00

– 63, CR 1310, issued on September 8, 2000). We are proposing to update the default
ratios for CY 2005. Table 33 lists the proposed CY 2005 default urban and rural CCRs by State.

We calculated the proposed statewide default CCRs in Table 33 using the same CCRs that we use to adjust charges to
costs on claims data. These CCRs are the ratio of total costs to total charges from each provider ’ s most recently submitted cost report, for those cost centers relevant to outpatient services. We also adjust these ratios to reflect final settled status by applying the differential
between settled to submitted costs and charges from the most recent pair of settled to submitted cost reports. The majority of submitted cost reports, 87 percent, were for CY 2002. We only
used valid CCRs to calculate these default ratios. That is, we removed the CCRs for all-inclusive hospitals, CAHs, and hospitals in Guam and the U.S. Virgin Islands because these entities are not paid under the OPPS, or in the case of all-inclusive hospitals, because their CCRs are suspect. We further identified and removed any obvious error CCRs and trimmed any outliers. We limited the hospitals used in the calculation of the default CCRs to those hospitals that
billed for services under the OPPS during CY 2003.

Finally, we calculated an overall average CCR, weighted by a measure of volume, for each State except Maryland.
This measure of volume is the total lines
on claims and is the same one that we use in our impact tables. Calculating a rate for Maryland presented a unique challenge. There are only a few providers in Maryland that are eligible to receive payment under the OPPS. However, we had no usable in-house cost report data for these Maryland hospitals. Therefore, we obtained data from the fiscal intermediary for Maryland which we attempted to use in calculating the CCRs for Maryland but which we ultimately determined could not be used to calculate representative CCRs. The cost data for 3 Maryland hospitals with very low volumes of services and cost data were so irregular
that we lacked confidence that it would result in a valid statewide CCR. Thus, for Maryland, we used an overall weighted average CCR for all hospitals in the nation to calculate the weighted average CCRs appearing in Table 33.
The overall decrease in default
statewide CCRs can be attributed to the general decline in the ratio between costs and charges widely observed in the cost report data.


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### 50530 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

2 Section 1833(t)(7) of the Act defined the ‘‘ preBBA ’’ amount for a period as the amount equal to the product of (1) the payment-to-cost ratio for the hospital based on its cost reporting period ending

in 1996 , and (2) the reasonable cost of the services for the period. (Emphasis added.) In this context, BBA refers to the Balanced Budget Act of 1997, Pub.

L. 105

– 33, enacted on August 5, 1997. B. Transitional Corridor Payments: Technical Change

[If you choose to comment on issues in this section, include the caption

‘‘ Transitional Corridor Payments ’’ at the beginning of your comment.]

When the OPPS was implemented, every provider was eligible to receive an additional payment adjustment (or transitional corridor payment) if the payments it received under the OPPS were less than the payment it would
have received for the same services under the prior reasonable cost-based system (section 1833(t)(7) of the Act). Transitional corridor payments were intended to be temporary payments for most providers but permanent payments
for cancer and children ’ s hospitals to ease their transition from the prior reasonable cost-based payment system to the prospective payment system.
Section 411 of Pub. L. 108

– 173 amended section 1833(t)(7)(D)(i) to the Act to extend such payments through December 31, 2005, for rural hospitals
with 100 or fewer beds and extended such payments for services furnished during the period that begins with the provider ’ s first cost reporting period beginning on or after January 1, 2004 and ends on December 31, 2005, for sole community hospitals located in rural areas. Accordingly, transitional corridor payments are only available to
children ’ s hospitals, cancer hospitals, rural hospitals having 100 or fewer beds, and sole community hospitals
located in rural areas.

At the time the OPPS was implemented, section 1833(t)(7)(F)(ii) of the Act defined the payment-to-cost ratio (PCR) used to calculate the ‘‘ preBBA amount ’’ 2 for purposes of calculating the transitional corridor payments to be determined using the payments and reasonable costs of services furnished during the provider ’ s cost reporting period ending in calendar year 1996. The BIPA, Pub. L. 106

– 554, enacted on December 21, 2000, revised that requirement. Section 403 of BIPA amended section 1833(t)(7)(F)(ii)(I) of
the Act to allow transitional corridor payments to hospitals subject to the
OPPS that did not have a 1996 cost report by authorizing use of the first available cost reporting period ending
after 1996 and before 2001 in calculating a provider ’ s PCR.

Although we discussed the BIPA
amendment in the CY 2002 OPPS


### 50531 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

proposed rule published on August 24, 2001 (66 FR 44674), and implemented the amendment through Program
Memorandum No. A

– 01

– 51, issued on April 13, 2001, we failed to revise the regulations at § 419.70(f)(2) to reflect the change. In this proposed rule, we are proposing a technical correction to § 419.70(f)(2) to conform it to the provision of section 1833(t)(7)(F)(ii)(I) of
the Act.

C. Status Indicators and Comment Indicators Assigned in the Outpatient Code Editor (OCE)

[If you choose to comment on issues in this section, include the caption ‘‘ Status Indicators and Comment Indicators ’’ at the beginning of your comment.]

1. Payment Status Indicators

The payment status indicators (SIs) that we assign to HCPCS codes and APCs under the OPPS play an important role in determining payment for services under the OPPS because they indicate whether a service represented by a HCPCS code is payable under the OPPS or another payment system and also whether particular OPPS policies apply to the code. For CY 2005, we are providing our proposed status indicator (SI) assignments for APCs in Addendum A, for the HCPCS codes in Addendum B, and the definitions of the status
indicators in Addendum D1 to this proposed rule.

Payment under the OPPS is based on
HCPCS codes for medical and other
health services. These codes are used for a wide variety of payment systems under Medicare, including, but not limited to, the Medicare fee schedule for physician services, the Medicare fee schedule for durable medical equipment and prosthetic devices, and the Medicare clinical laboratory fee schedule. For purposes of making payment under the OPPS, we must be able to signal the claims processing system through the Outpatient Code Editor (OCE) software, as to HCPCS codes that are paid under the OPPS and those codes to which particular OPPS payment policies apply. We accomplish this identification in the OPPS through the establishment of a system of status indicators with specific meanings. Addendum D1 contains the proposed
definitions of each status indicator for purposes of the OPPS for CY 2005.

We assign one and only one status
indicator to each APC and to each
HCPCS code. Each HCPCS code that is assigned to an APC has the same status
indicator as the APC to which it is assigned. Specifically, for CY 2005, we are proposing to use the following status indicators in the specified manner:

• ‘‘ A ’’ to indicate services that are paid under some payment method other than OPPS, such as under the durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) fee schedule or the physician fee schedule. Some, but not all, of these other payment systems are identified in Addendum D1 to this proposed rule.

• ‘‘ B ’’ to indicate the services that are not payable under the OPPS when submitted on an outpatient hospital Part B bill type, but that may be payable by fiscal intermediaries to other provider types when submitted on an appropriate bill type.

• ‘‘ C ’’ to indicate inpatient services that are not payable under the OPPS.

• ‘‘ D ’’ to indicate a code that is discontinued, effective January 1, 2005.

• ‘‘ E ’’ to indicate items or services that are not covered by Medicare or codes that not recognized by Medicare.

• ‘‘ F ’’ to indicate acquisition of corneal tissue, which is paid on a
reasonable cost basis and certain CRNA services that are paid on a reasonable
cost basis.

• ‘‘ G ’’ to indicate drugs, biologicals, and radiopharmaceutical agents that arepaid under the OPPS transitional passthrough rules.

• ‘‘ H ’’ to indicate devices that are paidunder the OPPS transitional passthrough rules and brachtheraphy sources that are paid on a cost basis.

• ‘‘ K ’’ to indicate drugs, biologicals (including blood and blood products), and radiopharmaceutical agents that are paid in separate APCs under the OPPS, but that are not paid under the OPPS transitional pass-through rules.

• ‘‘ L ’’ to indicate flu and pneumococcal immunizations that are paid at reasonable cost but to which no coinsurance or copayment apply.

• ‘‘ N ’’ to indicate services that are paid under the OPPS, but for which payment is packaged into another service or APC group.

• ‘‘ P ’’ to indicate services that are paid under the OPPS, but only in partial hospitalization programs.

• ‘‘ S ’’ to indicate significant procedures that are paid under the OPPS, but to which the multiple procedure reduction does not apply.

• ‘‘ T ’’ to indicate significant services that are paid under the OPPS and to which the multiple procedure payment discount under the OPPS applies.

• ‘‘ V ’’ to indicate medical visits (including emergency department or clinic visits) that are paid under the

OPPS.

• ‘‘ X ’’ to indicate ancillary services that are paid under the OPPS. • ‘‘ Y ’’ to indicate nonimplantable durable medical equipment that must be billed directly to the durable medical equipment regional carrier rather than to the fiscal intermediary.

We are proposing the payment status
indicators identified above for each
HCPCS code and each APC in Addenda A and B and are requesting comments on the appropriateness of the indicators we have assigned.

2. Comment Indicators

In the November 1, 2002 and the November 7, 2003 final rules with comment period, which implemented changes in the OPPS for CYs 2003 and 2004, respectively, we provided code
condition indicators in Addendum B.
The code condition indicators and their meaning are as follows:

• ‘‘ DG ’’— Deleted code with a grace period; Payment will be made under the deleted code during the 90-day grace period.

• ‘‘ DNG ’’— Deleted code with no grace period; Payment will not be made under
the deleted code.

• ‘‘ NF ’’— New code final APC assignment; Comments were accepted on a proposed APC assignment in the Proposed Rule; APC assignment is no longer open to comment.

• ‘‘ NI ’’— New code interim APC assignment; Comments will be accepted on the interim APC assignment for the
new code.

Medicare has permitted a 90-day grace period after implementation of an updated medical code set, such as the HCPCS, to give providers time to incorporate new codes in their coding and billing systems and to remove the
discontinued codes. HCPCS codes are updated annually every January 1, so the grace period for billing discontinued HCPCS was implemented every January 1 through March 31.

The Health Insurance Portability and Accountability Act (HIPAA) transaction and code set rules require usage of the
medical code set that is valid at the time that the service is provided. Therefore, effective January 1, 2005, CMS is eliminating the 90-day grace period for billing discontinued HCPCS codes. Details about elimination of the 90-day grace period for billing discontinued
HCPCS codes were issued to our contractors on February 6, 2004, in Transmittal 89, Change Request 3093.

In order to be consistent with the
HIPPA rule that results in the elimination of the 90-day grace period for billing discontinued HCPCS codes, we are proposing, effective January 1, 2005, to delete code condition
indicators ‘‘ DNG ’’ and ‘‘ DG ’’ . We are proposing to designate codes that are


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discontinued effective January 1, 2005
with status indicator ‘‘ D, ’’ as described in section VII.C.1. of this preamble.

Further, we are proposing to rename

‘‘ code condition ’’ indicators as

‘‘ comment indicators. ’’ In Addendum D2 to this proposed rule, we list the following two comment indicators that we are proposing to use to identify HCPCS codes assigned to APCs that are or are not subject to comment:

• ‘‘ NF ’’— New code, final APC assignment; Comments were accepted on a proposed APC assignment in the Proposed Rule; APC assignment is no longer open to comment.

• ‘‘ NI ’’— New code, interim APC assignment; Comments will be accepted on the interim APC assignment for the
new code.

D. Observation Services
[If you choose to comment on issues in this section, include the caption

‘‘ Observation Services ’’ at the beginning of your comment.]

Frequently, beneficiaries are placed in

‘‘ observation status ’’ in order to receive
treatment or to be monitored before making a decision concerning their next placement (that is, admit to the hospital or discharge). This status assignment occurs most frequently after surgery or a visit to the emergency department. For
a detailed discussion of the clinical and payment history of observation services, see the November 1, 2002 final rule with comment period (67 FR 66794).

Before the implementation of the OPPS in CY 2000, payment for
observation care was made on a reasonable cost basis, which gave hospitals a financial incentive to keep
beneficiaries in ‘‘ observation status ’’ even though clinically they were being treated as inpatients. With the initiation of the OPPS, observation services were no longer paid separately; that is, they were not assigned to a separate APC. Instead, costs for observation services were packaged into payments for the
services with which the observation
care was associated.

Beginning in early 2001, the APC Panel began discussing the topic of separate payment for observation services. In its deliberations, the APC
Panel asserted that observation services following clinical and emergency room visits should be paid separately, and that observation following surgery should be packaged into the payment for the surgical procedure. For CY 2002, we implemented separate payment for observation services (APC 0339) under
the OPPS for three medical conditions: chest pain, congestive heart failure, and asthma. A number of accompanying requirements were established, including the billing of an evaluation and management visit in conjunction with the presence of certain specified diagnosis codes on the claim, hourly billing of observation care for a minimum of 8 hours up to a maximum of 48 hours, timing of observation beginning with the clock time on the

nurse ’ s admission note and ending at the clock time on the physician ’ s discharge orders, a medical record documenting that the beneficiary was under the care of a physician who specifically assessed patient risk to determine that the beneficiary would benefit from observation care, and provision of specific diagnostic tests to beneficiaries based on their diagnoses. In developing this policy for separately payable observation services, we balanced issues of access, medical necessity, potential for abuse, and the need to ensure appropriate payment. We selected the three medical conditions, noted previously, and the accompanying diagnosis codes and diagnostic tests to avoid significant morbidity and mortality from inappropriate discharge while, at the same time, avoiding unnecessary inpatient admissions.

Over the past 2 years, we have
continued to review observation care
claims data for information on utilization and costs, along with additional information provided to us by physicians and hospitals concerning our current policies regarding separately payable observation services. Our primary goal is to ensure that Medicare beneficiaries have access to medically necessary observation care. We also want to ensure that separate payment is made only for beneficiaries actually receiving clinically appropriate
observation care.

In January 2003, the APC Panel
established an Observation Subcommittee. Over the last year, this
subcommittee has held discussions concerning observation care and
reviewed data extracted from claims that reported observation services. The subcommittee presented the results of
its deliberations to the full APC Panel at the February 2004 meeting. The APC Panel recommendations regarding observation care provided under the OPPS were broad in scope and included elimination of the diagnosis requirement for separate payment for observation services, elimination of the requirement for the concomitant diagnostic tests for patients receiving observation care, unpackaging of observation services beyond the typical expected recovery time from surgical and interventional procedures, and
modification of the method for measuring beneficiaries ’ time in observation to make it more compatible with routine hospital practices and their associated electronic systems.

In response to the APC Panel recommendations, we undertook a number of studies regarding observation services, while acknowledging data limitations from the brief 2-year experience the OPPS has had with separately payable observation services.

To assess the appropriateness of our proposal not to pay separately for observation services following surgical or interventional procedures, we analyzed the claims for these procedures to determine the extent to which the claims reported packaged
observation services codes. This analysis revealed that while observation services are being reported on some claims for surgical and interventional procedures, the great majority of claims for these procedures reported no observation services. The packaged
status of these observation services codes may result in underreporting their frequency, but the proportion of surgical and interventional procedures reported with the packaged observation services codes was so small that any increase would not change our substantive
conclusion. This confirms our belief that, although an occasional surgical case may require a longer recovery period than expected for the procedure, as a rule, surgical outpatients do not require observation care. Given the rapidly changing nature of outpatient surgical and interventional services, it
would be difficult to determine an expected typical recovery time for each procedure. We have concerns about
overutilization of observation services in the post-procedural setting as partial replacement for recovery room time. However, we note that, to the extent observation care or extended recovery services are provided to surgical or interventional patients, the cost of that care is packaged into the payment for the procedural APC which may result in higher median costs for those procedures.

We also analyzed the possibility of expanding the list of medical conditions for separately payable visit-related observation services, altering the requirements for diagnostic tests while in observation, and modifying the rules for counting time in observation care.

We looked at CY 2003 OPPS claims data for all packaged visit-related
observation care for all medical
conditions in order to determine
whether or not there were other diagnoses that would be candidates for separately payable observation services. Our analysis confirmed that the three


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diagnoses that are currently eligible for separate payment for observation services are appropriate, as those diagnoses are frequently reported in our visit-related claims with packaged observation services. In fact, diagnoses related to chest pain were, by far, the diagnosis most frequently reported for observation care, either separately payable or packaged. Other diagnoses that appeared in the claims data with packaged observation services included syncope and collapse, transient cerebral ischemia, and hypovolemia.

The packaged status of those observation stays means that the data are often incomplete and the frequency of services may be underreported. Generally, information about packaged services is not as reliably reported as is that for separately paid services. However, we are not convinced that, for those other conditions (such as hypovolemia, syncope and collapse, among others), there is a well-defined set of hospital services that are distinct from the services provided during a clinic or emergency room visit. Separately payable observation care must include specific, clinically appropriate services, and we are still accumulating data and experience for
the three medical conditions for which we are currently making separate payment. Therefore, we believe it is premature to expand the conditions for which we would separately pay for
visit-related observation services.

Hospitals have indicated that, even in the cases where the diagnostic tests have been performed, to assure that billing requirements for separately payable observation services under APC 0339 are met, they must manually review the medical records to prepare the claims. If they do not conduct this manual review, they may not be coding appropriately for separately payable
observation services.

We have also received comments from the community and the APC Panel asserting that the requirements for diagnostic testing are overly prescriptive and administratively burdensome, and that hospitals may perform tests to comply with the CMS requirements,
rather than based on clinical need. For example, a patient admitted directly to observation care with a diagnosis of chest pain may have had an electrocardiogram in a physician ’ s office just prior to admission to observation and may only need one additional electrocardiogram while receiving observation care. Thus, two more electrocardiograms performed in the hospital as required under the current OPPS observation policy might not be medically necessary. We continue to believe that the diagnostic testing criteria we established
for the three medical conditions are the minimally appropriate tests for patients receiving a well-defined set of hospital
observation services for those conditions. The previous example, notwithstanding, we also continue to believe that the majority of these tests would be performed in the hospital outpatient setting. We define
observation care as an active treatment to determine if a patient ’ s condition is going to require that he or she be admitted as an inpatient or if the condition resolves itself and the patient is discharged. The currently required diagnostic tests reflect that an active assessment of the patient was being undertaken, and we believe they are generally medically necessary to determine whether a beneficiary will benefit from being admitted to observation care and aid in determining the appropriate disposition of the patient following observation care.

After careful consideration, we agree that specifying which diagnostic tests must be performed as a prerequisite for payment of APC 0339 may be imposing an unreasonable reporting burden on hospitals and may, in some cases, result in unnecessary tests being performed. Therefore, beginning in CY 2005, we are proposing to remove the current requirements for specific diagnostic testing, and rely on clinical judgment in
combination with internal and external quality review processes to ensure that appropriate diagnostic testing (which we expect would include some of the currently required diagnostic tests) is provided for patients receiving high quality, medically necessary observation

care.

Accordingly, we are proposing that, beginning in CY 2005, the following tests would no longer be required to receive payment for APC 0339 (Observation):

• For congestive heart failure, a chest x-ray (71010, 71020, 71030), and electrocardiogram (93005) and pulse oximetry (94760, 94761, 94762)

• For asthma, a breathing capacity test (94010) or pulse oximetry (94760, 94761, 94762)

• For chest pain, two sets of cardiac enzyme tests; either two CPK (82550, 82552, 82553) or two troponins (84484, 84512) and two sequential electrocardiograms (93005)

We believe that this proposed policy change would benefit hospitals because it would reduce administrative burden, allow more flexibility in management of beneficiaries in observation care, provide payment for clinically appropriate care, and remove a requirement that may have resulted in duplicative diagnostic testing.

Hospitals and the APC Panel further suggested that we modify the method for accounting for the beneficiary ’ s time in observation care. Currently, hospitals report the time in observation beginning with the admission of the beneficiary to observation and ending with the physician ’ s order to discharge the patient from observation. There are two problems related to using the time of the physician discharge order to determine the ending time of observation care. First, providers assert that it is not possible to electronically capture the time of the physician ’ s orders for discharge. As a result, manual medical record review is required in order to bill accurately. Second, the hospital maycontinue to provide specific dischargerelated observation care for a short time after the discharge orders are written and, therefore, may not be allowed to account for the full length of the observation care episode. In an effort to reduce hospitals ’ administrative burden related to accurate billing, we are proposing to modify our instructions for counting time in observation care to end at the time the outpatient is actually discharged from the hospital or admitted as an inpatient. Our expectation is that specific, medically necessary observation services are being provided to the patient up until the time of discharge. However, we do not expect reported observation time to include the time patients remain in the observation
area after treatment is finished for reasons that include waiting for transportation home.

Although beneficiaries may be in observation care up to 48 hours or longer, we believe that, in general, 24 hours is adequate for the clinical staff to determine what further care the patient needs. In CY 2005, we would continue to make separate payment for
observation care based on claims meeting the requirement for payment of HCPCS code G0244 (Observation care provided by a facility to a patient with CHF, chest pain, or asthma, minimum 8 hours, maximum 48 hours). However, we are proposing not to include claims reporting more than 48 hours of observation care in calculating the final payment rate for APC 0339.

In CY 2005, we expect OPPS payments for observation care to
increase over CY 2004 levels for two reasons. First, our proposal to eliminate the requirement that specific diagnostic tests be performed in order to receive separate payment for observation care will result in more observation stays being paid for under APC 0339. We
identified a number of CY 2003 claims


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with packaged observation services reported for congestive heart failure (CHF), asthma, and chest pains that would have qualified for separate payment absent the requirement that certain diagnostic tests be reported on
the same claim. In the CY 2003 claims data we used for our analyses, we identified about 55,000 claims coded with G0244 for separate payment in
APC 0339. We also identified approximately 13,500 claims coded for observation care provided to
beneficiaries with one of the three eligible medical conditions that did not report HCPCS code G0244 for separate payment. Our analysis revealed that those claims satisfy all of the criteria for separate payment of observation services if we remove the requirements for diagnostic tests. As mentioned above, hospitals report that billing for separately payable observation services requires manual medical record review and the separate payment may not offset
the cost of the additional work even if patients ’ observation stays meet our criteria for separately payable observation services. Therefore, if we adopt our proposed changes, we expect the volume of claims for payment under

APC 0339 to increase in CY 2005.

This volume increase, combined with the slightly higher median cost
calculated for APC 0339 based on CY 2003 claims, would likely result in higher aggregate Medicare payments to hospitals for observation care in CY 2005 than in previous years. We attribute the increase in payment rate
for APC 0339 to an increase in the relative level of charges reported by hospitals for observation services in CY 2003, compared to the relative level of charges reported by hospitals for all other outpatient services furnished during the same period. Our budget neutrality simulations, which we discuss in section XVI. of this preamble
take into account both the increased payment for APC 0339 proposed for CY 2005, as well as the increase in the volume of separately payable observation services that we project could result from the changes in criteria that we are proposing for CY 2005.

Moreover, the increase in payments for observation care may be offset by a
modest decrease in the number of previously required diagnostic tests performed by hospitals for patients in
observation and in the reduction of billing for HCPCS code G0264, which pays for the initial nursing assessment of a patient directly admitted to observation for congestive heart failure, asthma, or chest pain when the stay
does not meet all of the criteria for

G0244.

In summary, to receive separate payment for medically necessary observation services, G0244 in APC 0339, involving specific goals and a plan of care that are distinct from the goals and plan of care for an emergency department, physician office, or clinic visit, we are proposing the following requirements beginning in CY 2005:

• The beneficiary must have one of three medical conditions: congestive heart failure, chest pain, or asthma. The hospital bill must report as the admitting or principal diagnosis an appropriate ICD

– 9

– CM code to reflect the condition. The eligible ICD

– 9

– CM diagnosis codes for CY 2005 are shown
in Table 34 below. • The hospital must provide and report on the bill an emergency department visit (APC 0610, 0611, or 0612), clinic visit (APC 0600, 0601, or 0602), or critical care (APC 0620) on the same day or the day before the separately payable observation care (G0244) is provided. For direct admissions to observation, in lieu of an emergency department visit, clinic visit, or critical care, G0263 (Adm with CHF, CP, asthma) must be billed on the same day as G0244.

• HCPCS code G0244 must be billed
for a minimum of 8 hours.

• No procedures with a T status indicator, except the code for infusion therapy of other than a chemotherapy drug (currently HCPCS code Q0081 or as proposed in this proposed rule, CPT code 90780), can be reported on the same day or day before observation care is provided.

• Observation time must be
documented in the medical record and begins with the beneficiary ’ s admission
to an observation bed and ends when he or she is discharged from the hospital.

• The beneficiary must be in the care of a physician during the period of observation, as documented in the medical record by admission, discharge, and other appropriate progress notes that are timed, written, and signed by the physician.

• The medical record must include documentation that the physician explicitly assessed patient risk to determine that the beneficiary would
benefit from observation care.

**BILLING CODE 4120**

**– 01** 

**– P** 


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### 50536 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

E. Procedures That Will Be Paid Only as Inpatient Procedures

[If you choose to comment on issues in this section, include the caption ‘‘ Inpatient Procedures ’’ at the beginning of your comment.]

Before implementation of the OPPS, Medicare paid reasonable costs for services provided in the outpatient department. The claims submitted were subject to medical review by the fiscal
intermediaries to determine the appropriateness of providing certain services in the outpatient setting. We


### 50537 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

did not specify in regulations those services that were appropriate to provide only in the inpatient setting and that, therefore, should be payable only when provided in that setting.

Section 1833(t)(1)(B)(i) of the Act gives the Secretary broad authority to
determine the services to be covered and paid for under the OPPS. In the April 7, 2000 final rule with comment period, we identified procedures that are typically provided only in an inpatient setting and, therefore, would not be paid by Medicare under the OPPS (65 FR 18455). These procedures comprise what is referred to as the

‘‘ inpatient list. ’’ The inpatient list specifies those services that are only paid when provided in an inpatient setting. These are services that require inpatient care because of the nature of the procedure, the need for at least 24 hours of postoperative recovery time or monitoring before the patient can be safely discharged, or the underlying physical condition of the patient. As we discussed in the April 7, 2000 final rule with comment period (65 FR 18455) and the November 30, 2001 final rule (66 FR 59856), we use the following criteria when reviewing procedures to determine whether or not they should be moved from the inpatient list and assigned to an APC group for payment
under the OPPS: • Most outpatient departments are equipped to provide the services to the Medicare population.

• The simplest procedure described by the code may be performed in most outpatient departments.

• The procedure is related to codes that we have already removed from the inpatient list.

In the November 1, 2002 final rule (67 FR 66792), we added the following criteria for use in reviewing procedures to determine whether they should be removed from the inpatient list and assigned to an APC group for payment
under the OPPS:

• We have determined that the procedure is being performed in multiple hospitals on an outpatient basis; or

• We have determined that the procedure can be appropriately and safely performed in an ASC and is on the list of approved ASC procedures or proposed by us for addition to the ASC
list.

At the February 2004 meeting, the
APC Panel made the recommendation to remove the following four abscess drainage CPT codes from the inpatient list: 44901, 49021, 49041, and 49061. As
discussed in section II.G. of this preamble, we agree with the APC
Panel ’ s recommendation and we are proposing to remove these four abscess codes from the inpatient list and to assign them to APC 0037 for OPPS payment in CY 2005. The APC Panel also made a
recommendation to either eliminate the inpatient list from the OPPS or to evaluate the current list of procedures for any other appropriate changes. To
determine the codes to be removed from the inpatient list, we have evaluated those codes that are performed in all sites of service other than the hospital inpatient setting approximately 60 percent or more of the time. We have chosen 60 percent as a threshold because, in general, we believe that a procedure should be considered for removal from the inpatient list if there is evidence that it is being performed
less than one half of the time in the hospital inpatient setting. For procedures where data have shown that they can be done in a safe and appropriate manner on an outpatient basis in a variety of different hospitals,
we believe that it would be reasonable to consider the removal of the procedure from the inpatient list. After careful evaluation of the list of inpatient codes against our criteria, we are proposing to remove the procedures listed in Table 35 from the inpatient list and to place them in APCs for payment under the
OPPS. All of these codes would be assigned a status indicator ‘‘ T ’’ , except for CPT codes 00174 and 00928, which would be assigned a status indicator ‘‘ N ’’ because, under the OPPS, anesthesia codes are packaged into the procedures with which they are billed.


### 50538 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

**BILLING CODE 4120**

**– 01** 

**– C** 

For the reasons stated above, we are not proposing to accept the APC Panel ’ s recommendation to completely eliminate the inpatient list for CY 2005. However, we are soliciting comments, especially from professional societies and hospitals, on whether these procedures are appropriate for removal from the inpatient list and on whether any other such procedures should be paid under the OPPS. We are also asking commenters who recommend that a procedure that is currently on the inpatient list be reclassified to an APC to include evidence (preferably from peer-reviewed medical literature) that the procedure is being performed on an outpatient basis in a safe and effective manner. We request that commenters suggest an appropriate APC assignment for the procedure, and furnish supporting data, in the event that we determine in the final rule, based on comments, that the procedure would be payable under the OPPS in CY 2005. F. Hospital Coding for Evaluation and Management Services
[If you choose to comment on issues in this section, include the caption ‘‘ E/M
Services Guidelines ’’ at the beginning of your comment.]

1. Background

Currently, for claims processing purposes, we direct hospitals to use the CPT codes used by physicians to report clinic and emergency department visits on claims paid under the OPPS. However, we have received comments suggesting that the CPT codes are insufficient to describe the range and mix of services provided to patients in the clinic and emergency department setting because they are defined to reflect only the activities of physicians (for example, ongoing nursing care, and patient preparation for diagnostic tests). For both clinic and emergency department visits, there are currently five levels of care. To facilitate proper coding, we require each hospital to create an internal set of guidelines to determine what level of visit to report for each patient (April 7, 2000, final rule with comment period (65 FR 18434)).

We have continued our efforts to address the situation of proper coding of clinic and emergency department visits to ensure proper Medicare payments to hospitals. Commenters who responded to the August 24, 2001 OPPS proposed rule (66 FR 44672) recommended that we retain the existing evaluation and management coding system until facility-specific evaluation and management codes for emergency department and clinic visits, along with national coding guidelines, were
established. Commenters also recommended that we convene a panel of experts to develop codes and guidelines that are simple to understand and to implement, and that are compliant with the HIPAA requirements. We agreed with these commenters, and in our November 1, 2002 OPPS final rule (67 FR 66792), we


### 50539 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

stated that we believed the most appropriate forum for development of new code definitions and guidelines would be an independent expert panel that could provide information and data to us. We believed that, in light of the expertise of organizations such as the AHA and the AHIMA, these organizations were particularly well equipped to do so and to provide ongoing education to providers.

The AHA and the AHIMA, on their own initiative, convened an independent expert panel comprised of members of the AHA and AHIMA, as well as representatives of the American College of Emergency Physicians, the Emergency Nurses Association, and the American Organization of Nurse Executives, to develop code descriptions and guidelines for hospital emergency department and clinic visits and to provide us with the information and data. In June 2003, we received the panel ’ s input concerning a set of national coding guidelines for emergency and clinic visits.

We are currently considering the panel ’ s set of coding guidelines and the public comments we have received in response to them. In the November 7,
2003 OPPS final rule with comment period (68 FR 63463), we also indicated that we would implement new evaluation and management codes only when we are also ready to implement guidelines for their use. We further indicated that we would allow ample opportunity for public comment, systems changes, and provider education before implementing such new coding requirements.

2. Proposal for Evaluation and Management Guidelines

In the November 7, 2003 OPPS final rule with comment period (68 FR 63463), we discussed our primary concerns and direction for developing the proposed coding guidelines for emergency department and clinic visits and indicated our plans to make available for public comment the proposed coding guidelines that we are considering through the CMS OPPS website as soon as we have completed them. We will notify the public through

our ‘‘ listserve ’’ when the proposed guidelines will become available. To subscribe to this listserve, individuals should access the following website: http://www.cms.hhs.gov/medlearn/ listserv.asp and follow the directions to the OPPS listserve. When we post the proposed guidelines on the website, we will provide ample opportunity for the public to comment.

In addition, we will provide ample
time to train clinicians and coders on the use of new codes and guidelines and for hospitals to modify their systems. We anticipate providing at least 6 to 12 months notice prior to implementation of the new evaluation and management codes and guidelines. We will continue working to develop and test the new codes even though we have not yet made plans for their implementation.

G. Brachytherapy Payment Issues
[If you choose to comment on issues in this section, include the caption

‘‘ Brachytherapy ’’ at the beginning of your comment.]

Payment for Brachytherapy Sources (Section 621(b) of Pub. L. 108–173, MMA)

Sections 621(b)(1) and (b)(2) of Pub. L.

108

– 173 amended the Act by adding section 1833(t)(16)(C) and section 1833(t)(2)(H), respectively, to establish separate payment for devices of brachytherapy consisting of a seed or seeds (or radioactive source) based on a hospital ’ s charges for the service, adjusted to cost. Charges for the brachytherapy devices may not be used in determining any outlier payments under the OPPS. In addition, consistent with our practice under the OPPS to exclude items paid at cost from budget neutrality consideration, these items must be excluded from budget neutrality as well. The period of payment under this provision is for brachytherapy sources furnished from January 1, 2004 through December 31,

2006.

In the OPPS interim final rule with comment period published on January 6, 2004 (69 FR 827), we implemented sections 621(b)(1) and 621(b)(2)(C) of
Pub. L. 108

– 173. We stated that we will pay for the brachytherapy sources listed
in Table 4 of the interim final rule with comment period (69 FR 828) on a cost basis, as required by the statute. The status indicator for brachytherapy sources was changed to ‘‘ H. ’’ The
definition of status indicator ‘‘ H ’’ was for pass-through payment only for devices, but the brachytherapy sources affected by new sections 1833(t)(16)(C) and 1833(t)(2)(H) of the Act are not pass-through device categories. Therefore, we also changed, for CY 2004, the definition of payment status
indicator ‘‘ H ’’ to include nonpassthrough brachytherapy sources paid on
a cost basis. This use of status indicator

‘‘ H ’’ is a pragmatic decision that allows us to pay for brachytherapy sources in
accordance with new section 1833(t)(16)(C) of the Act, effective January 1, 2004, without having to modify our claims processing systems. We stated in the January 6, 2004 interim final rule with comment period that we
would revisit the use and definition of
status indicator ‘‘ H ’’ for this purpose in the OPPS update for CY 2005. Therefore, in this proposed rule, we are soliciting further comments on this policy.

As we indicated in the January 6,
2004 interim final rule with comment period, we began payment for the brachytherapy source in HCPCS code C1717 (Brachytx source, HCR lr

– 192) based on the hospital ’ s charge adjusted to cost beginning January 1, 2004. Prior
to enactment of Pub. L. 108

– 173, these sources were paid as packaged services
in APC 0313. As a result of the requirement under Pub. L. 108

– 173 to pay for C1717 separately, we adjusted the payment rate for APC 0313, Brachtherapy, to reflect the unpackaging of the brachytherapy source.

Section 1833(t)(2)(H) of the Act, as added by section 621(b)(2)(C) of Pub. L.

108

– 173, mandated the creation of separate groups of covered OPD services that classify brachytherapy devices separately from other services or groups of services. The additional groups must
be created in a manner that reflects the number, isotope, and radioactive intensity of the devices of brachytherapy furnished, including separate groups for Palladium-103 and
Iodine-125 devices.

We invited the public to submit
recommendations for new codes to describe brachytherapy sources in a manner that reflects the number, radioisotope, and radioactive intensity of the sources. We requested commenting parties to provide a detailed rationale to support
recommended new codes. We stated that we would propose appropriate changes in codes for brachytherapy sources in the CY 2005 OPPS update.

At its meetings of February 18 through 20, 2004, the APC Panel heard from parties that recommended the addition of two new brachytherapy codes and HCPCS codes for high activity Iodine-125 and high activity Palladium-103. The APC Panel, in turn,
recommended that CMS establish new HCPCS codes and new APCs, on a per source basis, for these two brachytherapy sources.

We have considered this recommendation and agree with the APC Panel. Therefore, we are proposing to establish the following two new brachytherapy source codes for CY

2005:

• Cxxx1 Brachytherapy source, high activity, Iodine-125, per source

• Cxxx2 Brachytherapy source, high activity, Palladium-103, per source


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In addition, we believe the APC
Panel ’ s recommendation to establish
new HCPCS codes that would distinguish high activity Iodine-125 from high activity Palladium-103 on a per source basis is an approach that should be implemented for other brachytherapy code descriptors, as well. Specifically, that recommendation would require that we include in the HCPCS code descriptor for such brachytherapy sources that the new high activity sources are paid ‘‘ per source. ’’ Therefore, we are proposing to include

‘‘ per source ’’ in the HCPCS code descriptors for all those brachytherapy source descriptors for which units of payment are not already delineated.

Further, a new linear source
Palladium-103 came to our attention in CY 2003 by means of an application for a new device category for pass-through payment. While we declined to create a new category for pass-through payment,
we believe that this source falls under the provisions of Pub. L. 108

– 173 for separate cost-based payment as a brachytherapy source. Accordingly, we are proposing to add, for separate payment, the following code of linear
source Palladium-103: Cxxx3Brachytherapy linear source, Palladium103, per 1 mm.

Table 36 provides a complete listing of the HCPCS codes, long descriptors, APC assignments and status indicators that we are proposing for brachytherapy sources paid under the OPPS in CY

2005.

**BILLING CODE 4120**

**– 01** 

**– P** 

**BILLING CODE 4120**

**– 01** 

**– C** 
H. Payment for APC 0375, Ancillary Outpatient Services When Patient Expires

In CY 2003, we implemented a new
modifier

– CA, Procedure payable only in the inpatient setting when performed emergently on an outpatient who dies before admission. The purpose of this modifier is to allow payment, under certain conditions, for outpatient
services on a claim that have the same
date of service as a HCPCS code with
status indicator ‘‘ C ’’ that is billed with
modifier

– CA. When a procedure with
status indicator ‘‘ C ’’ (inpatient services not payable under the OPPS) was billed with modifier

– CA, we made payment of a fixed amount, under New Technology APC 0977.

In the November 7, 2003 final rule with comment period, we implemented APC 0375 to pay for services furnished
in CY 2004 on the same date billed for a procedure code with modifier

– CA, (68 FR 63467). We were concerned that


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continuing to pay a fixed amount under a new technology APC for otherwise payable outpatient services furnished on
the same date of service that a procedure with status indicator ‘‘ C ’’ is performed emergently on an outpatient would not result in appropriate payment for these services. That is, continuing to make payment under a new technology APC would not allow us to establish a relative payment weight for the services, subject to recalibration based on actual hospital

costs.

We implemented a payment rate of $1,150 for APC 0375, which is the payment amount for the restructured New Technology

— Level XIII, APC 1513, that replaced APC 0977, in CY 2004. We also stated that for the CY 2005 update of the OPPS, we would calculate a median cost and relative payment weight for APC 0375 using charge data
from CY 2003 claims for line items with
a HCPC code and status indicator ‘‘ V, ’’

‘‘ S, ’’ ‘‘ T, ’’ ‘‘ X, ’’ ‘‘ N, ’’ ‘‘ K, ’’ ‘‘ G, ’’ and ‘‘ H, ’’ in addition to charges for revenue codes without a HCPCS code, that have the same date of service reported for a procedure billed with modifier

– CA. We would then determine whether to set payment for APC 0375 based on our claims data or continue a fixed payment rate for these special services.

In accordance with this methodology,
for CY 2005 we reviewed the services on the 18 claims that reported modifier

– CA in CY 2003. We calculated a median cost for the aggregated payable services on the 18 claims reporting
modifier

– CA in the amount of $2,804.18. The mix of outpatient services that were reported appeared reasonable for a patient with an emergent condition requiring immediate medical intervention, and revealed a wide range of costs, which would also be expected. Therefore, we are proposing to set the payment rate for
APC 0375 in accordance with the same methodology we have followed to set payment rates for the other procedural APCS in CY 2005, based on the relative payment weight calculated for APC

0375.
VIII. Proposed Conversion Factor Update for CY 2005
[If you choose to comment on issues in this section, please indicate the caption

‘‘ Conversion Factor ’’ at the beginning of your comment.]

Section 1833(t)(3)(C)(ii) of the Act requires us to update the conversion factor used to determine payment rates
under the OPPS on an annual basis. Section 1833(t)(3)(C)(iv) of the Act provides that, for CY 2005, the update is equal to the hospital inpatient market basket percentage increase applicable to hospital discharges under section 1886(b)(3)(B)(iii) of the Act.

The forecast of the hospital market basket increase for FY 2005 published in the IPPS proposed rule on May 18, 2004, is 3.3 percent (69 FR 28374). To set the proposed OPPS conversion factor for CY 2005, we increased the CY 2004 conversion factor of $54.561, as specified in the November 7, 2003 final rule (68 FR 63459), by 3.3 percent.

In accordance with section 1833(t)(9)(B) of the Act, we further adjusted the proposed conversion factor
for CY 2004 to ensure that the revisions we are proposing to update by means ofthe wage index are made on a budgetneutral basis. We calculated a proposed budget neutrality factor of 1.001 for wage index changes by comparing total payments from our simulation model using the proposed FY 2005 IPPS wage index values to those payments using the current (FY 2004) IPPS wage index values. In addition, for CY 2005, allowed pass-through payments have decreased to 0.13 percent of total OPPS payments, down from 1.3 percent in CY 2004. The proposed conversion factor is also adjusted by the difference in estimated pass-through payments of 1.17 percent.

The proposed market basket increase update factor of 3.3 percent for CY 2005, the required wage index budget neutrality adjustment of approximately 1.001, and the 1.17 percent adjustment to the pass-through estimate result in a proposed conversion factor for CY 2005 of $57.098.

IX. Proposed Wage Index Changes for

CY 2005
[If you choose to comment on issues in this section, please include the caption

‘‘ Wage Index ’’ at the beginning of your comment.]

Section 1833(t)(2)(D) of the Act requires the Secretary to determine a wage adjustment factor to adjust, for geographic wage differences, the portion of the OPPS payment rate and the copayment standardized amount
attributable to labor and labor-related cost. This adjustment must be made in a budget neutral manner.

As discussed in section III.B., of this preamble, we are proposing to standardize 60 percent of estimated costs (labor-related costs) for geographic area wage variation using the IPPS wage indices that are calculated prior to adjustments for reclassification to
remove the effects of differences in area wage levels in determining the OPPS payment rate and the copayment standardized amount. The proposed IPPS pre-reclassified urban and rural wage indices for FY 2005 are reprinted in Addenda L and M of this proposed
rule.

In accordance with section 1886(d)(3)(E) of the Act, the IPPS wage index is updated annually. In this proposed rule, we are proposing to use the proposed corrected FY 2005 hospital IPPS wage index for urban areas published in the Federal Register on June 25, 2004 (69 FR 35919) and the proposed FY 2005 hospital IPPS wage index for rural areas published in the Federal Register on May 18, 2004 (69 FR 28580) to determine the wage adjustments for the OPPS payment rate and the copayment standardized
amount for CY 2005. We note that the proposed FY 2005 IPPS wage indices reflect a number of proposed changes as
a result of the new OMB standards for defining geographic statistical areas, the proposed implementation of a occupational mix adjustment as part of the wage index, and new wage adjustments provided for under Pub. L.

108

– 173. The following is a brief summary of the proposed changes in the FY 2005 IPPS wage indices and any adjustments that we are proposing to apply to the OPPS for CY 2005. (We refer the reader to the May 18, 2004 IPPS proposed rule (69 FR 28248) for a fuller discussion of the proposed changes to the wage indices.)

A. The proposed use of the new Core Based Statistical Areas (CBSAs) issued by the Office of Management and Budget (OMB) as revised standards for designating geographical statistical areas based on the 2000 Census data, to define labor market areas for hospitals for purposes of the IPPS wage index. The OMB revised standards were published
in the Federal Register on December 27, 2000 (65 FR 82235), and OMB announced the new CBSAs on June 6, 2003, through an OMB bulletin. In the FY 2005 hospital IPPS proposed rule, for wage index purposes, we proposed to treat hospitals designated as rural
under the new CBSA classification system that were previously located in an MSA as if they were located in their old MSA, and further proposed to maintain that MSA designation for determining a wage index for the next 3 years. To be consistent, we are proposing to apply the same criterion to TEFRA hospitals paid under the OPPS
but not under the IPPS and to maintain that MSA designation for determining a wage index for the next 3 years. This proposed policy would impact six TEFRA providers for purposes of OPPS payment.

B. The proposed incorporation of a blend of an occupational mix adjusted wage index into the unadjusted wage


### 50542 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

index to reflect the effect of hospitals ’ employment choices of occupational categories to provide specific patient

care.

C. The reclassifications of hospitals to geographic areas for purposes of the wage index that were approved under the one-time appeal process for hospitals authorized under section 508
of Pub. L. 108

– 173 (May 18, 2004 IPPS proposed rule (69 FR 28265 through 28266)).

D. The proposed implementation of an adjustment to the wage index to
reflect the ‘‘ out-migration ’’ of hospital employees who reside in one county but commute to work in a different county with a higher wage index, in accordance
with section 505 of Pub. L. 108

– 173 (May 18, 2004 IPPS proposed rule (69 FR 28266 through 28269). Hospitals paid under the IPPS located in the qualifying section 505 ‘‘ out-migration ’’ counties received a wage index increase. We are proposing to apply the same criterion to TEFRA hospitals paid under the OPPS but not paid under the IPPS. Therefore, TEFRA hospitals located in a qualifying section 505 county would also receive an increase to their wage
index under OPPS. These additional hospitals are listed in Addendum K to this proposed rule with all IPPS hospitals receiving a wage index increase because they are located in a qualifying 505 county.

The following proposed FY 2005 IPPS wage indices that were published in the May 18, 2004 Federal Register (69 FR 28195) or corrected in the June 25, 2004 Federal Register (69 FR 35919) are reprinted as Addenda in this OPPS proposed rule: Addendum H

— Wage Index for Urban Areas; Addendum I

— Wage Index for Rural Areas; Addendum J

— Wage Index for Hospitals That Are Reclassified; Addendum K

— Wage Index Adjustment for Commuting Hospital Employees (Out-Migration) in Qualifying Counties; Addendum L

— Pre-Reclassified Wage Index for Urban Areas; Addendum M

— Pre-Reclassified Wage Index for Rural Areas; Addendum

N

— Hospital Reclassifications and Redesignations by Individual Hospital
under Section 508 of Pub. L. 108

– 173. We are proposing to use these IPPS indices, as they are finalized by July 30, 2004, to adjust the payment rates and
coinsurance amounts that we will publish in the OPPS final rule for CY
2005. Because the reclassification that results from implementation of section
508 of Pub. L. 108

– 173 is not subject to budget neutrality, we have not taken it into account in developing the OPPS budget neutrality estimates for CY 2005. However, the wage index increases that result from implementation of section 505 of Pub. L. 108

– 173 are subject to budget neutrality. Therefore, we have included the wage index changes
associated with section 505 of Pub. L.

108

– 173 in calculating the OPPS budget neutrality estimates for CY 2005.

X. Determination of Proposed Payment Rates and Outlier Payments for CY

2005
A. Calculation of the Proposed National Unadjusted Medicare Payment
[If you choose to comment on issues in this section, please indicate the caption

‘‘ Payment Rate for APCs ’’ at the beginning of your comment.]

The basic methodology for determining prospective payment rates
for OPD services under the OPPS is set forth in existing regulations at §§ 419.31 and 419.32. The payment rate for services and procedures for which payment is made under the OPPS is the product of the conversion factor
calculated in accordance with section VIII. of this proposed rule, and the relative weight determined under section III. of this proposed rule. Therefore, the national unadjusted payment rate for APCs contained in Addendum A to this proposed rule and for payable HCPCS codes in Addendum B to this proposed rule (Addendum B is provided as a convenience for readers) was calculated by multiplying the proposed CY 2005 scaled weight for the APC by the proposed CY 2005
conversion factor.

However, to determine the payment
that would be made under the OPPS to a specific hospital for an APC for a service other than a drug, in a circumstance in which the multiple procedure discount does not apply, we take the following steps:

Step 1. Calculate 60 percent (the labor-related portion) of the national unadjusted payment rate. Since initial implementation of the OPPS, we have used 60 percent to represent our estimate of that portion of costs attributable, on average, to labor. (See the April 7, 2000 final rule with comment period (65 FR 18496 through 18497), for a detailed discussion of how we derived this percentage.)

Step 2. Determine the wage index area in which the hospital is located and identify the wage index level that applies to the specific hospital. Addenda H, I, J, and L to this proposed rule, which reflect the new proposed geographic statistical areas as a result of revised OMB standards (urban and rural) to which hospitals would be assigned for FY 2005 under the IPPS and the reclassifications of hospitals under the one-time appeals process under section 508 of Pub. L. 108

– 173, contain the wage index values assigned to each area. The wage index values include the proposed occupational mix adjustment described in section IX. of this proposed rule that was developed
for the IPPS.

Step 3. Adjust the wage index of hospitals located in certain qualifying counties that have a relatively high percentage of hospital employees who reside in the county but who work in a different county with a higher wage index, in accordance with section 505 of
Pub. L. 108

– 173. Addendum K contains the qualifying counties and the proposed wage index increase developed for the IPPS.

Step 4. Multiply the applicable wage index determined under Steps 2 and 3 by the amount determined under Step 1 that represents the labor-related portion of the national unadjusted payment rate.

Step 5. Calculate 40 percent (the nonlabor-related portion) of the national unadjusted payment rate and add that amount to the resulting product of Step 4. The result is the wage index adjusted payment rate for the relevant wage
index area.

B. Proposed Hospital Outpatient Outlier Payments [If you choose to comment on issues in this section, please indicate the caption

‘‘ Outlier Payments ’’ at the beginning of your comment.]

For OPPS services furnished between August 1, 2000, and April 1, 2002, we calculated outlier payments in the aggregate for all OPPS services that appear on a bill in accordance with section 1833(t)(5)(D) of the Act. In the November 30, 2001 final rule (66 FR 59856 through 59888), we specified that, beginning with CY 2002, we calculate outlier payments based on
each individual OPPS service. We revised the aggregate method that we had used to calculate outlier payments and began to determine outlier payments on a service-by-service basis.

As explained in the April 7, 2000 final rule with comment period (65 FR 18498), we set a target for outlier payments at 2.0 percent of total payments. For purposes of simulating payments to calculate outlier thresholds, we set the target for outlier payments at 2.0 percent for CYs 2001, 2002, 2003, and 2004. For reasons discussed in the November 7, 2003 final rule with comment period (68 FR 63469), for CY 2004, we established a separate outlier threshold for CMHCs. For CY 2004, the outlier threshold is met when costs of furnishing a service or procedure by a hospital exceed 2.6 times the APC payment amount or when


### 50543 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

the cost of furnishing services by a
CMHC exceeds 3.65 times the APC payment amount. The current outlier payment percentage is 50 percent of the
amount of costs in excess of the
threshold.

For CY 2005, we are proposing to continue to set the target for outlier payments at 2.0 percent of total OPPS payments (a portion of that 2.0 percent, 0.6 percent, would be allocated to CMHCs for partial hospitalization program (PHP) services).

Outlier payments are intended to ensure beneficiary access to services by having the Medicare program share in the financial loss incurred by a provider associated with individual, extraordinarily expensive cases. They are not intended to pay hospitals additional amounts for specific services
on a routine basis. In its March 2004 Report, MedPAC found that 50 percent of OPPS outlier payments in CY 2004 were for 21 fairly common services that had relatively low APC payment rates, such as plain film x-rays and pathology services. We are concerned by the MedPAC findings which indicate that a significant portion of outlier payments are being made for high volume, lower cost services rather than for unusually high cost services, contrary to the intent of an outlier policy. (A full discussion
of the 2004 MedPAC recommendations
related to the OPPS and the CMS response to those recommendations can
be found in section XII. of this preamble.)

In light of the MedPAC findings, we are proposing to change the standard we have used to qualify a service for outlier payments since the OPPS was originally implemented. That is, in addition to the outlier threshold we have applied since the beginning of the OPPS, which requires that a hospital ’ s cost for a service exceed the APC payment rate for that service by a specified multiple of the APC payment rate, we are proposing
to add a fixed dollar threshold that
would have to be met in order for a service to qualify for an outlier payment. Section 1833(t)(5)(A) of the Act gives the Secretary the authority to impose a fixed dollar threshold in addition to an APC multiplier threshold. By imposing a dollar threshold, we expect to redirect outlier payments from lower cost, relatively simple procedures to more complex, expensive procedures
for which the costs associated with individual cases could be exceptionally high and for which hospitals have a financial risk would be at greater risk financially.

In this proposed rule, we are proposing to require that, in order to qualify for an outlier payment, the cost of a service must exceed 1.5 times the APC payment rate and the cost must
also exceed the sum of the APC rate plus a $625 fixed dollar threshold. Based upon our review of the data, a threshold of $625 better meets our 2.0 percent targets. When the cost of a hospital outpatient service exceeds these thresholds, we would pay 50 percent of the amount by which the cost of furnishing the service exceeds 1.5 times the APC payment rate (the APC multiple) as an outlier payment.

We are proposing to set the dollar threshold at a level that would, for all intents and purposes, exclude outliers
for a number of lower cost services. For example, under the CY 2004 methodology a service mapped to an APC with a payment rate of $20 would only have to exceed $52 (2.6 × APC payment amount) in order to qualify for an outlier payment. Our proposed policy for CY 2005 with the additional fixed dollar threshold would require that the service in this example exceed $645 in order to qualify for an outlier payment. That is, the cost of the service
would have to exceed both 1.5 times the APC payment rate, or $30, and $645 ($20 + $625).

The proposed dollar threshold would
also enable us to lower the APC multiplier portion of the total outlier
threshold from 2.6 to 1.5. We have chosen a multiple of 1.5 because this continues to recognize some variability relative to APC payment implicit in the current statute, but limits its impact in determining outlier payments. Under the proposed changes to the outlier methodology, it would also be easier for the higher cost cases of a complex, expensive procedure or service to qualify for outlier payments because the $625 threshold is a small portion of the total payment rate for high cost services. For example, under the CY 2004 methodology, a service mapped to an APC with a payment rate of $20,000 would have to exceed $52,000 in order to qualify for an outlier payment but, as proposed for CY 2005, would have to exceed only $30,000. That is, the cost of
the service would have to exceed both 1.5 times the APC payment rate, or $30,000, and $20,625 ($20,000 + $625). Further, outlier payments for unusually expensive cases would be higher because the APC multiplier for outlier payment would decrease from 2.6 to 1.5 times the APC payment rate.

As discussed in the following section pertaining to Proposed Payment for Partial Hospitalization services, we are proposing to set the APC multiplier
outlier threshold for CMHCs for CY 2005 at 3.35 times the APC payment
amount and the CY 2005 outlier payment percentage applicable to costs in excess of the threshold at 50 percent.

C. Proposed Payment for Partial Hospitalization
[If you choose to comment on issues in this section, please indicate the caption

‘‘ Partial Hospitalization ’’ at the beginning of your comment.]

1. Background

Partial hospitalization is an intensive outpatient program of psychiatric services provided to patients as an alternative to inpatient psychiatric care
for beneficiaries who have an acute mental illness. A partial hospitalization program (PHP) may be provided by a hospital to its outpatients or by a
Medicare-certified CMHC. Section 1833(t)(1)(B)(i) of the Act provides the Secretary with the authority to designate the hospital outpatient services to be
covered under the OPPS. Section 419.21(c) of the Medicare regulations that implement this provision specifies that payments under the OPPS will be made for partial hospitalization services furnished by CMHCs. Section 1883(t)(2)(C) of the Act requires that we establish relative payment weights based on median (or mean, at the election of the Secretary) hospital costs determined by 1996 claims data and
data from the most recent available cost reports. Payment to providers under the OPPS for PHPs represents the provider ’ s overhead costs associated with the program. Because a day of care is the
unit that defines the structure and scheduling of partial hospitalization services, we established a per diem payment methodology for the PHP APC,
effective for services furnished on or after August 1, 2000. For a detailed discussion, see the April 7, 2000 OPPS final rule (65 FR 18452).

2. Proposed PHP APC Update for CY

2005

For calculation of the proposed CY 2005 per diem payment, we used the same methodology that was used to compute the CY 2004 per diem payment. For CY 2004, the per diem amount was based on three quarters of hospital and CMHC PHP claims data (for services furnished from April 1, 2002, through December 31, 2002). We used data from all hospital bills reporting condition code 41, which identifies the claim as partial hospitalization, and all bills from
CMHCs because CMHCs are Medicare providers only for the purpose of providing partial hospitalization services. We used cost-to-charge ratios from the most recently available hospital and CMHC cost reports to


### 50544 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

convert each provider ’ s line item charges as reported on bills, to estimate the provider ’ s cost for a day of PHP
services. Per diem costs are then computed by summing the line item costs on each bill and dividing by the number of days on the bill.

Unlike hospitals, CMHCs do not file cost reports electronically and the cost report information is not included in the Healthcare Cost Report Information System (HCRIS). The CMHC cost reports are held by the Medicare fiscal intermediaries. In a Program Memorandum issued on January 17, 2003 (Transmittal A

– 03

– 004), we
directed fiscal intermediaries torecalculate hospital and CMHC cost-tocharge ratios using the most recently settled cost reports by April 30, 2003.Following the initial update of cost-tocharge ratios, fiscal intermediaries were further instructed to continue to update a provider ’ s cost-to-charge ratio and enter revised cost-to-charge ratios into the outpatient provider specific file.Therefore, for CMHCs, we use cost-tocharge ratios from the outpatient provider specific file. For CY 2005, we analyzed 12 months of data for hospital
and CMHC PHP claims for services furnished between January 1, 2003, andDecember 31, 2003. Updated cost-tocharge ratios reduced the median cost per day for CMHCs. The revised medians are $313 for CMHCs and $213 for hospitals. Combining these files results in a median per diem PHP cost of $297. As with all APCs in the OPPS,
the median cost for each APC is scaled
to be relative to a mid-level office visit and the conversion factor is applied. We are proposing the resulting APC amount for PHP of $292.19 for CY 2005, of which $58.44 is the beneficiary ’ s coinsurance.

3. Separate Threshold for Outlier Payments to CMHCs

In the November 7, 2003 final rule with comment period (68 FR 63469), we indicated that, given the difference in PHP charges between hospitals and CMHCs, we did not believe it was appropriate to make outlier payments to CMHCs using the outlier percentage target amount and threshold established for hospitals. There was a significant
difference in the amount of outlier payments made to hospitals and CMHCs for PHP. Further analysis indicated the use of outlier payments was contrary to the intent of the outlier policy as discussed previously in section X.B. above. Therefore, for CY 2004, we established a separate outlier threshold for CMHCs. We designated a portion of the estimated 2.0 percent outlier target amount specifically for CMHCs, consistent with the percentage of projected payments to CMHCs under the OPPS in CY 2004, excluding outlier payments.

As stated in the November 7, 2003 final rule with comment period, CMHCs were projected to receive 0.5 percent of the estimated total OPPS payments in
CY 2004. The CY 2004 outlier threshold is met when the cost of furnishing services by a CMHC exceeds 3.65 times the APC payment amount. The current outlier payment percentage is 50 percent of the amount of costs in excess
of the threshold.

CMS and the Office of the Inspector General are continuing to monitor the excessive outlier payments to CMHCs. However, we do not yet have CY 2004
claims data that will show the effect of the separate outlier threshold for CMHCs that was effective January 1, 2004. Therefore, for CY 2005, as
discussed in section X.B. of this preamble, we are proposing to continue to set the target for hospital outpatient outlier payments at 2.0 percent of total OPPS payments. We are proposing that a portion of that 2.0 percent, 0.6 percent, would be allocated to CMHCs for PHP services. We propose 0.6 percent for CMHCs because the percentage of CMHC ’ s payment to total OPPS payment rose slightly in the CY
2003 claims data. In the absence of CY 2004 claims data, we developed
simulations for CY 2005. As discussed in section X.B. of this preamble, we are proposing a dollar threshold in addition to an APC multiplier threshold for hospital OPPS outlier payments. However, because PHP is the only APC for which CMHCs may receive payment under the OPPS, we would not expect to redirect outlier payments by imposing a dollar threshold. Therefore, we are not proposing a dollar threshold for CMHC outliers. We are proposing to
set the outlier threshold for CMHCs for CY 2005 at 3.35 percent times the APC payment amount and the CY 2005 outlier payment percentage applicable
to costs in excess of the threshold at 50 percent.
XI. Proposed Beneficiary Copayments
for CY 2005
[If you choose to comment on issues in this section, please indicate the caption

‘‘ Copayment ’’ at the beginning of your comment.]

A. Background

Section 1833(t)(3)(B) of the Act requires the Secretary to set rules for determining copayment amounts to be paid by beneficiaries for covered OPD services. Section 1833(t)(8)(C)(ii) of the Act specifies that the Secretary must reduce the national unadjusted copayment amount for a covered OPD service (or group of such services) furnished in a year in a manner so that the effective copayment rate (determined on a national unadjusted basis) for that service in the year does not exceed specified percentages. For all services paid under the OPPS in CY 2005, the specified percentage is 45 percent of the APC payment rate. Section 1833(t)(3)(B)(ii) of the Act provides that, for a covered OPD service (or group of such services) furnished in a year, the national unadjusted
coinsurance amount cannot be less than 20 percent of the OPD fee schedule

amount.
B. Proposed Copayment for CY 2005

For CY 2005, we determined copayment amounts for new and revised APCs using the same methodology that we implemented for CY 2004 (see the November 7, 2003 final rule 68 FR 63458). The unadjusted copayment amounts for services payable under the OPPS effective January 1, 2005 are
shown in Addendum A and Addendum

B.

XII. MedPAC Recommendations

The Medicare Payment Advisory Commission (MedPAC) in its March 2004 Report to the Congress: ‘‘ Medicare Payment Policy, ’’ made two recommendations relating to the OPPS. This section provides responses to those
recommendations.

Recommendation 3A

– 2: The Congress should increase payment rates for the OPPS by the projected rate of increase in the hospital market basket index for

CY 2005.

Response: Section 1833(t)(3)(C)(ii) of the Act requires the Secretary to update
the conversion factor used to determine payment rates under the OPPS on an annual basis. Section 1833(t)(3)(C)(iv) of the Act provides that, for CY 2005, the update is equal to the hospital inpatient market basket percentage applicable under section 1886(b)(3) of the Act to hospital discharges. The forecast of the hospital market basket increase for FY 2005 published in the IPPS proposed rule on May 18, 2004, is 3.3 percent (69 FR 63459). Therefore, in accordance with this statutory requirement, we are proposing to update the OPPS conversation factor for CY 2005 by 3.3 percent as discussed in section VIII. of this preamble.

Recommendation 3A

– 3: The Congress should eliminate the outlier policy under the outpatient PPS.

Response: We have carefully reviewed the MedPAC report regarding this recommendation and are concerned by


### 50545 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

its findings which indicate that a significant portion of outlier payments are being made for high volume, lower cost services rather than for unusually high cost services, contrary to the intent of an outlier policy. While it is evident that the OPPS outlier payments cannot be discontinued by us without a legislative change by Congress, we believe that the MedPAC findings warrant a change in our standard for qualifying a hospital outpatient service for an outlier payment. Therefore, in light of the MedPAC findings we are proposing to change the standard we have used to qualify a service for an outlier payment since initial implementation of the OPPS. As
discussed in section X.B. of this preamble, we are proposing to add a fixed dollar threshold requirement to the current threshold, which requires that a hospital ’ s cost for a service exceed the APC payment rate for that service by a specified multiple in order to qualify for an outlier payment. That is, we are proposing to require, that in order to qualify for an outlier payment, the cost
of a service must exceed 1.5 times the APC payment rate and the cost must
also exceed the sum of the APC rate plus a $625 fixed dollar threshold. By imposing a dollar threshold in addition to an APC multiplier threshold, we expect to redirect outlier payments from lower cost and relatively simple procedures to more complex, expensive procedures for which the costs
associated with individual cases could be exceptionally high.

We are not proposing to apply the
fixed dollar threshold to CMHCs because partial hospitalization services are the only APC service for which CMHCs can receive payment under the OPPS, and we would not expect to redirect outlier payment by imposing a
dollar threshold.

XIII. Addenda Files Available to the
Public Via Internet

The data referenced for Addenda C and G to this proposed rule are available on the following CMS Web site via Internet only: http://www.cms.hhs.gov/ providers/hopps/. We are not republishing the data represented in these two Addenda to this proposed
rule because of their volume. For additional assistance, contact Chris Smith-Ritter at (410) 786

– 0378. Addendum C

— Healthcare Common Procedure Coding System (HCPCS) Codes by Ambulatory Payment Classification (APC.)

This file contains the HCPCS codes sorted by the APCs into which they are assigned for payment under the OPPS.
The file also includes the APC status indicators, relative weights, and OPPS payment amounts.

XIV. Collection of Information Requirements

Under the Paperwork Reduction Act of 1995 (PRA), we are required to provide 60-day notice in the Federal Register and solicit public comment
before a collection of information requirement is submitted to the Office of Management and Budget (OMB) for review and approval. In order to evaluate fairly whether an information collection should be approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 requires that we solicit comment on the following issues:

• The need for the information collection and its usefulness in carrying out the proper functions of our agency.

• The accuracy of our estimate of the
information collection burden.

• The quality, utility, and clarity of
the information to be collected.

• Recommendations to minimize the
information collection burden on the affected public, including automated collection techniques.

We are soliciting public comments on each of these issues for the following information collection requirement: Section 410.16 Initial preventive physical examination. Proposed new section 410.16 would require, for the furnishing of education, counseling and referral services as part of an initial preventive physical examination, a written plan for obtaining the appropriate screening and other preventive services which are also covered as separate Medicare B Part

services.

The burden associated with this requirement is the time required of the physician or practitioner to provide beneficiaries with education, counseling, and referral services and to develop and provide a written plan for obtaining screening and other preventive services.

While these requirements are subject to the PRA, the burden associated with these requirements is currently captured
and discussed in the ‘‘ Revisions to Payment Policies Under the Physician
Fee Schedule for CY 2005 ’’ (CMS

– 1429

– P). This section mirrors that proposed rule for convenience purposes.

We have submitted a copy of this proposed rule to OMB for its review of the information collection requirements described above. These requirements are not effective until they have been approved by OMB.

If you comment on any of these
information collection and record keeping requirements, please mail copies directly to the following: Centers for Medicare & Medicaid Services, Office of Strategic Operations and Regulatory Affairs, Regulations Development and Issuances Group, Attn: John Burke, CMS

– 1427

– P, Room
C5

– 14

– 03, 7500 Security Boulevard, Baltimore, MD 21244

– 1850; and Office of Information and Regulatory

Affairs, Office of Management and Budget, Room 10235, New Executive Office Building, Washington, DC 20503, Attn: Christopher Martin, CMS
Desk Officer
Comments submitted to OMB may also be e-mailed to the following
address: e-mail: Christopher

_ Martin@omb.eop.gov , or faxed to OMB at (202) 395

– 6974.
XV. Response to Public Comments

Because of the large number of items of correspondence we normally receive on a proposed rule, we are not able to acknowledge or respond to them individually. However, in preparing the final rule, we will consider all comments concerning the provisions of this proposed rule that we receive by the date and time specified in the **DATES** section of this preamble, and when we proceed with a subsequent document, we will respond to the comments in the preamble to that document.

XVI. Regulatory Impact Analysis

A. OPPS: General

We have examined the impacts of this rule as required by Executive Order 12866 (September 1993, Regulatory Planning and Review), the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96

– 354), section 1102(b) of the Social Security Act, the Unfunded Mandates Reform Act of 1995 (Pub. L.

104

– 4), and Executive Order 13132.

Executive Order 12866 (as amended by Executive Order 13258, which merely reassigns responsibility of duties) directs agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). A regulatory impact analysis (RIA) must be prepared for major rules with economically significant effects ($100 million or more in any 1 year).

We estimate the effects of the provisions that would be implemented by this proposed rule would result in expenditures exceeding $100 million in any 1 year. We estimate the total increase (from changes in the proposed rule as well as enrollment, utilization,


### 50546 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

and case mix changes) in expenditures under the OPPS for CY 2005 compared to CY 2004 to be approximately $1.5 billion. Therefore, this proposed rule is an economically significant rule under Executive Order 12866, and a major rule under 5 U.S.C. 804(2).

The RFA requires agencies to
determine whether a rule would have a significant economic impact on a
substantial number of small entities. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and government agencies. Most hospitals and most other providers and suppliers are small entities, either by nonprofit status or by having revenues of $6 million to $29 million in any 1 year ( see 65 FR 69432).

For purposes of the RFA, we have determined that approximately 37 percent of hospitals would be considered small entities according to
the Small Business Administration (SBA) size standards. We do not have
data available to calculate the percentages of entities in the pharmaceutical preparation manufacturing, biological products, or
medical instrument industries that
would be considered to be small entities according to the SBA size standards. For the pharmaceutical preparation manufacturing industry (NAICS 325412), the size standard is 750 or fewer employees and $67.6 billion in annual sales (1997 business census). For biological products (except diagnostic) (NAICS 325414), with $5.7 billion in annual sales, and medical instruments (NAICS 339112), with $18.5 billion in annual sales, the standard is 50 or fewer employees (see the standards website at http://www.sba.gov/regulations/ siccodes/ ). Individuals and States are
not included in the definition of a small entity.

In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a rule may have a significant impact on the operations of
a substantial number of small rural hospitals. This analysis must conform to the provisions of section 603 of the RFA. With the exception of hospitals located in certain New England counties, for purposes of section 1102(b) of the Act, we previously defined a small rural hospital as a hospital with
fewer than 100 beds that is located outside of a Metropolitan Statistical Area (MSA) (or New England County Metropolitan Area (NECMA)). However,
under the new labor market definitions that we are proposing to adopt, we no longer employ NECMAs to define urban areas in New England. Therefore, we now define a small rural hospital as a hospital with fewer than 100 beds that is located outside of an MSA. Section 601(g) of the Social Security Amendments of 1983 (Pub. L. 98

– 21) designated hospitals in certain New England counties as belonging to the adjacent NECMA. Thus, for purposes of the OPPS, we classify these hospitals as urban hospitals. We believe that the changes in this proposed rule would
affect both a substantial number of rural hospitals as well as other classes of hospitals and that the effects on some may be significant. Therefore, we conclude that this proposed rule would have a significant impact on a
substantial number of small entities.

Unfunded Mandates

Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L.

104

– 4) also requires that agencies assess anticipated costs and benefits before issuing any rule that may result in an expenditure in any 1 year by State, local, or tribal governments, in the aggregate, or by the private sector, of $110 million. This proposed rule would not mandate any requirements for State, local, or tribal governments. This proposed rule would not impose unfunded mandates on the private sector of more than $110 million
dollars.

Federalism

Executive Order 13132 establishes certain requirements that an agency must meet when it publishes a proposed rule (and subsequent final rule) that imposes substantial direct costs on State and local governments, preempts State law, or otherwise has Federalism implications.

We have examined this proposed rule
in accordance with Executive Order 13132, Federalism, and have
determined that it would not have an impact on the rights, roles, and responsibilities of State, local or tribal governments. The impact analysis ( see Table 37) shows that payments to governmental hospitals (including State, local, and tribal governmental hospitals) would increase by 4.3 percent under the proposed rule.

B. Impact of Proposed Changes in This Proposed Rule

We are proposing several changes to the OPPS that are required by the statute. We are required under section 1833(t)(3)(C)(ii) of the Act to update annually the conversion factor used to determine the APC payment rates. We are also required under section 1833(t)(9)(A) of the Act to revise, not less often than annually, the wage index and other adjustments. In addition, we must review the clinical integrity of payment groups and weights at least annually. Accordingly, in this proposed rule, we are proposing to update the conversion factor and the wage index adjustment for hospital outpatient services furnished beginning January 1,
2005 as we discuss in sections VIII. and IX., respectively, of this proposed rule. We are also proposing to revise the relative APC payment weights using claims data from January 1, 2003 through December 31, 2003. Finally, we are proposing to remove 6 devices and 12 drugs and biological agents from pass-through payment status. In particular, see section V.A.2 with regard to the expiration of pass-through status
for devices and see section IV.A.2 with regard to the expiration of pass-through status for drugs and biological agents.

Under this proposed rule, the update change to the conversion factor as provided by statute as well as the additional money for the OPPS payments in CY 2005 as authorized by
Pub. L. 108

– 173, including money for drugs and increases in the wage index adjustment, would increase total OPPS payments by 4.6 percent in CY 2005. The changes to the wage index and to the APC weights (which incorporate the cessation of pass-through payments for several drugs and devices) would not increase OPPS payments because the OPPS is budget neutral. However, the wage index and APC weight changes would change the distribution of payments within the budget neutral system as shown in Table 37 and
described in more detail in this section.

C. Alternatives Considered

Alternatives to the changes we are making and the reasons that we have chosen the options we have are discussed throughout this proposed rule. Some of the major issues discussed in this proposed rule and options that affect our policies are discussed below.

Payment for Device-Dependent APCs

We package payment for an implantable device into the APC payment for the procedure performed to
insert the device. Because almost all devices lost pass-through status at the end of CY 2002, we discontinued use of separate codes to report devices in CY
2003. We have found that claims thatwe use to set payment rates for devicedependent APCs frequently have packaged costs that are much lower than the cost of the device. This is attributed, in part, to variations in hospital billing practices. In response, we reestablished device codes for reporting on a voluntary basis in CY 2004.

The APC Panel recommended that we use CY 2004 device-dependent APC


### 50547 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

rates updated for inflation as the CY 2005 payments. We considered this option but did not adopt it because it would not recognize changes in relative
cost for these APCs and would not advance us towards our goal of using unadjusted claims data as the basis for payment weights for all OPPS services.

In addition to consideration of the
APC Panel ’ s recommendation, we considered using CY 2002 claims to
calculate a ratio between the median calculated using all single bills and the median calculated using only claims with HCPCS codes for devices on them, and applying that ratio to the median calculated using CY 2003 claims data. We rejected this option because it assumes that the relationship between
the costs of the claims with and without codes for devices is a valid relationship not only for CY 2002 but CY 2003 as well. It also assumes no changes in billing behavior. We have no reason to believe either of these assumptions is true and, therefore, we did not choose this option.

We do not believe that any of the above options would help us progress
toward reliance on our data. Rather than adoption of any of those approaches, we developed an option to adjust thepayment for only those devicedependent APCs that have the most
dramatic decreases for CY 2005. We believe that the better payment approach for determining median costs for device-dependent APCs in CY 2005
would be to base these medians on the greater of (1) median costs calculated using CY 2003 claims data, or (2) 90 percent of the APC payment median
used in CY 2004 for these services. We believe that this proposed adjustment methodology provides an appropriate transition to eventual use of all single bill claims data without adjustment.

We are also proposing to use ‘‘ C ’’ codes to bill for the device-dependent procedures for which we adjusted the
medians for CY 2005 as well as for a few APCs that require devices that are coming off pass-through payment in CY 2005 (a continuation of current billing practice). We believe that adoption of our proposal will mitigate barriers to beneficiary access to care while encouraging hospitals to bill correctly for the services they furnish. For a more detailed discussion of this issue, see section III. of the preamble.

Proposed Hospital Outpatient Outlier Payments

In its March 2004 Report, MedPAC made a recommendation to the Congress to eliminate the outlier provision under
the OPPS. MedPAC made its recommendation after studying outlier payments on claims for services furnished during CY 2002 and concluding that in 2002, 50 percent of outlier payments were paid for 21 fairly common services that had relatively low APC payment rates, while high cost services accounted for only a small share of outlier payments. However, outlier payments are required under the statute; therefore, we cannot discontinue outlier payments absent a legislative change by the Congress.

In light of the MedPAC findings, we are proposing a change to the threshold we use for qualifying a service for outlier payments to add a fixed dollar
threshold in addition to the threshold based on a multiple of the APC amount that we have applied since the beginning of the OPPS. For a more detailed discussion of this issue, see section X. of the preamble.

D. Limitations of Our Analysis

The distributional impacts represent the projected effects of the policy changes, as well as the statutory changes
that would be effective for CY 2005 on various hospital groups. We estimate the effects of individual policy changes by estimating payments per service while holding all other payment policies
constant. We use the best data available but do not attempt to predict behavioral responses to our policy changes. In addition, we are not proposing to make adjustments for future changes in variables such as service volume, service mix, or number of encounters. As we have done in previous proposed rules, we are soliciting comments and information about the anticipated effects of these proposed changes on hospitals and our methodology for estimating
them.

E. Estimated Impacts of This Proposed Rule on Hospitals

The OPPS is a budget neutral payment system under which the increase to the total payments made under OPPS is limited by the increase
to the conversion factor set under the methodology in the statute. The
enactment of Pub. L. 108

– 173 on December 8, 2003, provided for the payment of additional dollars in 2005 to providers of OPPS services outside of the budget neutrality requirements for both specified covered outpatient drugs (see section V.A.3.a. of the preamble to this rule) and the wage indexes for specific hospitals through
reclassification reform in section 508 of
Pub. L. 108

– 173 (see section IX. of the preamble to this rule). Table 38 shows the estimated redistribution of hospital payments among providers as a result of a new APC structure and wage index, which are budget neutral; the estimated distribution of increased payments in CY 2005 resulting from the combined impact of APC recalibration and wage effects, and market basket update to the conversion factor; and estimated payments considering all proposed changes for CY 2005. In some cases, specific hospitals may receive more total payment in CY 2005 than in CY 2004 while in other cases they may receive less total payment than they received in CY 2004. However, our impact analysis suggests that no class of hospitals would receive less total payments in CY 2005 than in CY 2004. Because updates to the conversion factor, including the market basket and any reintroduction of pass-through dollars, are applied uniformly, the extent to which this proposed rule redistributes money would largely depend on the mix of services furnished by a hospital (for example, how the APCs for the hospital ’ s most frequently furnished services would change) and the impact of the wage index changes on the hospital.

Overall, the proposed OPPS rates for CY 2005 would have a positive effect for every category of hospital. Proposed changes will result in a 4.6 percent increase in Medicare payments, to all hospitals, exclusive of outlier and transitional pass-through payments. As described in the preamble, budget neutrality adjustments are made to the
conversion factor and the relative weights to ensure that the revisions in the wage index, APC groups, and relative weights do not affect aggregate payments. The impact of the wage and APC recalibration changes are moderate across hospital groups.

To illustrate the impact of the proposed CY 2005 changes, our analysis begins with a baseline simulation model that uses the final CY 2004 weights, the FY 2004 final post-reclassification wage index without increases resulting from section 508 reclassifications, and the
final CY 2004 conversion factor.
Columns 2 and 3 in Table 38 reflect the independent effects of the changes in
the APC reclassification and recalibration changes and the wage index, respectively. These effects are budget neutral, which is apparent in the overall zero impact in payment for all hospitals. Column 2 shows the independent effect of changes resulting
from the reclassification of HCPCS codes among APC groups and the recalibration of APC weights based on a complete year of 2003 hospital OPPS
claims data. We modeled the independent effect of APC recalibration by varying only the weights, final CY 2004 weights versus proposed CY 2005


### 50548 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

weights, in our baseline model, and calculating the percent difference in payments. Column 3 shows the impact of updating the wage index used to calculate payment by applying the FY 2005 hospital inpatient wage index. In addition to new wage data, the new inpatient hospital wage index uses the Core Based Statistical Area (CBSA) system as the basis for geographic adjustment for wages, rather than the Metropolitan Statistical Areas (MSA) designations used previously. The CY 2005 proposed OPPS wage index also includes the new adjustment for occupational mix, the reclassifications of hospitals to geographic areas by the Medicare Geographic Classification Review Board, and the increased payment authorized by section 505 of
Pub. L. 108

– 173 for out-migration. However, the proposed OPPS wage index does not include wage increases due to reclassification of hospitals through section 508 of Pub. L. 108

– 173. We modeled the independent effect of introducing a new wage index by varying only the wage index between years, using CY 2004 weights, and a CY
2004 conversion factor that included a budget neutrality adjustment.

Column 4 demonstrates the combined

‘‘ budget neutral ’’ impact of APC recalibration and wage index updates on various classes of hospitals, as well as the impact of updating the conversion
factor with the market basket. We modeled the independent effect of budget neutrality adjustments and the market basket update by using the weights and wage index for each year, and using a CY 2004 conversion factor that included a budget neutrality adjustment for differences in wages and the market basket increase. Finally, the remaining column depicts the full impact of proposed CY 2005 policy on each hospital group by including the effect of all the changes for CY 2005. Column 5 shows not only the combined budget neutral effects of APC and wage updates, and the market basket update,
but it also shows the effects of
additional monies added to the OPPS as
a result of Pub. L. 108

– 173 and passthrough money returned to the
conversion factor from CY 2004. We modeled the independent effect of all changes using the final weights for CY
2004 and CY 2005 with additional money for drugs authorized by section
621 of Pub. L. 108

– 173, final wage indexes including wage index increases for hospitals eligible for reclassification
under section 508 of Pub. L.108

– 173 and the CY 2005 proposed conversion factor of $57.098. Column 1: Total Number of Hospitals

Column 1 in Table 38 shows the total number of hospital providers, 4,821, for
which we were able to use CY 2003 hospital outpatient claims to model CY 2004 and CY 2005 payments by category. We excluded all hospitals for which we could not accurately estimate CY 2004 or CY 2005 payment and entities that are not paid under the
OPPS. The latter include critical access hospitals, all-inclusive hospitals, and hospitals located in Guam, the U.S. Virgin Islands, and the State of Maryland. This process is discussed in greater detail in section III.B of the preamble. In prior years, we displayed non-TEFRA hospitals paid under PPS separately from TEFRA hospitals in our impact and outlier tables. The
distinction between TEFRA and nonTEFRA holds little value for OPPS as all hospitals are treated equally under the OPPS payment system. Therefore, for this proposed rule we did not include TEFRA hospitals as a distinct hospital category in Table 38. Finally, of the hospitals displayed in Table 38 and Table 39, it is important to note that section 1833(t)(7)(D) of the Act holds harmless cancer hospitals, children ’ s hospitals, small rural hospitals with less than 100 beds, and sole community hospitals. These hospitals cannot receive less payment in CY 2005 than they did in the CY 2004.

Column 2: APC Recalibration

The APC reclassification and recalibration changes tend to favor rural hospitals especially those characterized as small, although the overall redistribution impact is modest. Rural hospitals show a 0.9 percent increase. Specifically, rural hospitals with 0 to 49 beds experience an increase of 1 percent, rural hospitals with 50 to 100 beds show a 1.4 percent increase and rural hospitals with 101 to 149 beds show a 0.9 percent increase attributable to the APC recalibration. Rural hospitals also show overall increases by region,
with the East North Central and East South Central regions benefiting by 1.3 percent and the Mountain region gaining 2.3 percent. Further, sole community hospitals experience an increase of 0.9 percent.

Urban hospitals show, on an average, a 0.2 percent decrease. This decrease is
concentrated in ‘‘ other ’’ urban hospitals, which experience a decline of 0.4 percent. Urban hospitals with greater than 300 beds show decreases, and the largest urban hospitals with bed size greater than 500 report a decrease of 2.0 percent. The smallest urban hospitals report a positive 1.1 percent increase, and urban hospitals with 200 to 299 beds show an increase of 0.1 percent. Urban hospitals also demonstrate overall decreases by region, with South Atlantic hospitals losing 1.2 percent and West South Central hospitals losing 0.5 percent attributable to APC
recalibration.

The largest observed impacts among other hospital classes resulting from
APC recalibration include declines of 2 percent for major teaching hospitals and 2.2 percent for hospitals without a valid low-income indicator, most of which are TEFRA hospitals. Hospitals treating more low-income patients also demonstrate declines as high as 1.3 percent. In these tables, cancer and
children ’ s hospitals also demonstrate declines of 2.3 and 2.4 percent, respectively. However, these hospitals

are ‘‘ held harmless ’’ by section 1833(t)(7)(D)(ii) of the Act.

In general, APC changes effect the distribution of hospital payments by increasing payments to small rural hospitals while decreasing those made to large urban hospitals, including major teaching hospitals and those serving low-income patients.

Column 3: Wage Effect

Changes introduced by the new wage index had a very modest impact, with the majority of these marginal declines located in rural hospitals. Overall, urban hospitals experience no change and rural hospitals experience a decrease of 0.2 percent. This pattern is evident in all of the urban and rural comparisons. Low-volume urban hospitals with fewer than 5000 services and urban hospitals in the West South Central region show the largest percentage increases, 0.7 and 0.8 respectively, attributable to wage index changes.

Specifically, rural hospitals show
modest decreases for most bed sizes but show the largest losses for categories with greater than 149 beds where the wage index change results in a 0.4 percent decrease for the largest rural hospitals. Hospitals located in the New England and Middle Atlantic regions show a negative impact due to wage index changes regardless of urban or rural designation. Rural hospitals in the South Atlantic region decrease by 0.6 percent. As noted previously, rural hospitals with 100 or fewer beds and sole community hospitals are ‘‘ held
harmless ’’ and earn, at least, the same amount as they earned in CY 2004.

Rural hospitals providing a low volume of services, 10,999 or fewer services, are also estimated to experience modest declines, and rural hospitals providing a high volume of services, greater than 42,999 services,


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also face a decline of 0.6 percent. This same pattern continues for rural hospitals in half of the regions with the New England region experiencing the largest decline of 1.3 percent.

Looking across other categories of hospitals, major teaching hospitals are estimated to lose 0.3 percent. Hospitals not serving low-income patients lose 0.8 percent, and, among hospitals serving low-income patients, those serving a high percentage of low-income patients also experience a decline. Hospitals for which DSH is not available, mostly TEFRA hospitals, lose 0.3 percent.

Column 4: Budget Neutrality and Market Basket Update

In general, the market basket update lessens the overall impact of the budget neutrality adjustments made in columns 2 and 3. As column 4 demonstrates,
with the addition of the market basket update, we do not expect any class of hospital providers to experience an overall negative impact as a result of the proposed changes to OPPS for CY 2005. Further, the redistributions created by
APC recalibration tend to offset those
observed with the introduction of the new wage index. For example, rural hospitals may gain 0.9 percent from the APC changes but lose 0.2 percent as a result of changes to the wage index. Overall, the budget neutrality adjustments and the introduction of the market basket may result in a projected increase of 4.1 percent for rural hospitals. Urban hospitals show a decrease of 0.2 percent resulting from APC recalibration and no change as a result of the new wage index, leading to an update in column 4 of 3.1 percent.

However, for several classes of hospitals, positive or neutral wage effects do not offset the impact of APC recalibration resulting in lower update amounts. Specifically, major teaching hospitals may only gain 0.9 with the update factor. Urban hospitals with more than 500 beds show a gain of 1.2 percent because the impact of APC recalibration was a 2 percent decline. Hospitals serving a medium level of low-income patients, between 0.16 and 0.23 percent, may experience an update of only 1.9 percent.

A handful of hospital providers may experience much lower and higher update amounts because the combined impact of the budget neutrality adjustments for the APC recalibration and the new wage index are reinforcing. Specifically, low volume rural hospitals show an update of 2.4 percent. Cancer hospitals show an update of only 0.2 percent and children ’ s hospitals, of only 1.3 percent. But as noted earlier, statutory provisions ensure that each of these hospitals is ‘‘ held harmless ’’ relative to last year ’ s payments. A handful of hospitals may also gain from the combined positive effect of the APC recalibration and the wage effect.
Overall low volume to mid-volume urban hospitals and urban hospitalswith a small number of beds, midvolume rural hospitals, and rural hospitals in the East South Central, Pacific, and Mountain regions have projected updates ranging from 5.0 to 5.2 percent.
Column 5: All Proposed Changes for CY

2005

Column 5 compares all proposed changes for CY 2005 to final simulated payment for CY 2004 and includes all additional dollars resulting from provisions in Pub. L. 108

– 173 and the difference in pass-through estimates.

In both urban and rural areas, hospitals that provide a lower volume of outpatient services are projected to receive a larger increase in payments than higher volume hospitals. In rural areas, hospitals with service volumes between 5,000 and 42,999 are projected to experience increases larger than 5.5 percent. Urban hospitals that provide
low-volume services show similar rates of increases (5.4 to 5.8 percent). Conversely, urban and rural hospitals providing more than 42,999 services are projected to experience a rate of increase in the 4.1 to 4.3 percent range. The overall projected increase in payments for urban hospitals is slightly lower (4.5 percent) than the average increase for all hospitals (4.6 percent) while the increase for rural hospitals is slightly greater (5.3 percent) than the average increase.

Major teaching hospitals are projected to experience a smaller increase in payments (2.9 percent) than the aggregate for all hospitals (4.6 percent) due to negative impacts from both the APC recalibration (

¥ 2.0 percent) and wage index (

¥ 0.3 percent). Hospitals with less intensive teaching programs are projected to experience an overall increase (4.7 percent). There is some difference in impact among hospitals that serve low-income patients where increases in payments range from 3.9 to 5.0 percent higher than in CY 2004.

F. Projected Distribution of Outlier Payments

As stated in section X.B. of this preamble, we have allocated 2 percent of the estimated CY 2005 expenditures to outlier payments. For 2005, we are proposing to add a fixed dollar threshold to our outlier policy. As
discussed in section X.B. of the preamble, we are proposing to change our current policy, which sets the outlier threshold using only a multiple of the APC payment rate, to a policy that includes both a multiple of the APC payment rate and a new fixed dollar threshold. We hope that this policy would better target outlier payments to higher cost cases.

For CY 2005, we are specifically proposing to require that, in order to qualify for an outlier payment, the cost
of a service must exceed 1.5 times the APC payment rate and the cost must
also exceed the sum of the APC rate plus a $625 fixed dollar threshold. The outlier payment under this proposed policy remains at 50 percent of the cost minus the multiple of the APC payment

rate.

Table 38 below compares the percentage of outlier payments relative to total projected payments for the simulated CY 2004 and proposed CY 2005 outlier policies. In order to model 2 percent of total estimated payments in outlier payments for the simulated CY 2004 policy option, we had to lower the multiple for this policy from its current level of 2.6 percent to 2.25 percent.

Overall, Table 38 demonstrates that the proposed outlier policy accomplishes the goal of redistributing outlier payments to hospitals performing more expensive procedures and incurring greater financial risk. First, based on the mix of services for the hospitals that would be paid under the OPPS in CY 2005, fewer hospitals would receive outlier payments. This is appropriate as more outlier money is targeted to specific services. We estimate that approximately 88 percent of all hospitals would receive outlier payments under the proposed policy, where 95 percent of all hospitals were estimated to get these types of payments

in CY 2004.

We estimate that the redistribution of outlier payments under the proposed policy tends to benefit urban hospitals, especially major teaching hospitals,
children ’ s hospitals, and those that serve a smaller percentage of low income patients. The distribution observed here may offset the less than average increases in payment observed for these same classes of hospitals in the overall impact Table 37. Rural hospitals, specifically those that show a small number of beds and report low volume, are eligible for fewer outlier payments when compared to other types of hospital categories. Rural hospitals in the Mid Atlantic, West South Central, Mountain, and Pacific regions, show a smaller percent of outlier payments for CY 2005 when compared to the average. Sole community hospitals; hospitals without a DSH percent, mostly TEFRA


### 50550 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

hospitals; and urban hospitals located in the New England area show a small percentage share of their total payments attributable to outlier payments when compared to other types of hospital categories.

G. Estimated Impacts of This Proposed Rule on Beneficiaries

For services for which the beneficiary pays a coinsurance of 20 percent of the payment rate, the beneficiary share of payment will increase for services for which OPPS payments will rise and will
decrease for services for which OPPS payments will fall. For example, for a mid-level office visit (APC 0601), the minimum unadjusted co-payment in 2004 was $10.71; under this proposedrule, the minimum unadjusted copayment for APC 601 would be $11.27 because the OPPS payment for the
service will increase under this rule.

However, in all cases, the statutelimits beneficiary liability for copayment for a service to the inpatient hospital deductible for the applicable year. This amount is $912 for CY 2005.

We estimate that the overall impact on the CY 2005 Part B monthly premium rate due to the projected increase in OPPS spending is $0.70. This is the impact due only to the projected increase in spending from 2004 to 2005 and does not reflect any increase in the premium rate in order to put the trust fund asset level within an acceptable range.

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Conclusion

Notwithstanding the statutory ‘‘ hold
harmless ’’ provisions that prevent negative impacts on small rural, sole community, cancer, and children ’ s hospitals, the changes in this proposed rule would affect all classes of hospitals, and the effects on some may be significant. Table 38 demonstrates the estimated distributional impact of the OPPS budget neutrality requirements and an additional 4.6 percent increase in payments proposed for CY 2005,
exclusive of outlier and transitional pass-through payments, across various classes of hospitals. These two tables and the accompanying discussion below, in combination with the rest of this proposed rule, constitute a regulatory impact analysis.

In accordance with the provisions of Executive Order 12866, this regulation was reviewed by the Office of Management and Budget.

XVII. Regulation Text

List of Subjects

42 CFR Part 410

Health Facilities, Health professions, Kidney diseases, Laboratories, Medicare, Rural areas, X-rays.

42 CFR Part 411

Kidney diseases, Medicare, Reporting and recordkeeping requirements.

42 CFR Part 419

Hospitals, Medicare, Reporting and recordkeeping requirements.

For the reasons set forth in the preamble, the Centers for Medicare & Medicaid Services proposes to amend 42 CFR Chapter IV, as set forth below:

A. Part 410 is amended as follows:

**PART 410**

**— SUPPLEMENTARY**  **MEDICAL INSURANCE (SMI)**
**BENEFITS**

1. The authority citation of part 410
continues to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh).

2. A new § 410.16 is added to read as
follows:

**§ 410.16 Initial preventive physical** 
**examinations: conditions for and limitations**

**on coverage.**

(a) Definitions. As used in this section, the following definitions apply:

Eligible beneficiary means individuals who receive their initial preventive physical examinations within 6 months
after the effective date of their first Medicare Part B coverage period, but only if their first Part B coverage period begins on or after January 1, 2005.

Initial preventive physical

examination means all of the following services furnished to an individual by a physician or a qualified nonphysician practitioner with the goal of health promotion and disease detection:

(1) Review of the beneficiary ’ s comprehensive medical and social history.

(2) Review of the beneficiary ’ s potential (risk factors) for depression, including past experiences with depression or other mood disorders, based on the use of an appropriate screening instrument that the physician or qualified nonphysician practitioner may select, unless the appropriate screening instrument is further defined through a national coverage
determination.

(3) Review of the beneficiary ’ s functional ability and level of safety, based on the use of an appropriate screening instrument, which the physician or qualified nonphysician practitioner may select, unless the appropriate screening instrument is further defined through a national coverage determination.

(4) An examination to include
measurement of the individual ’ s height, weight, blood pressure, a visual acuity screen, and other factors as deemed appropriate, based on the individual ’ s medical and social history and current
clinical standards.

(5) Performance of an electrocardiogram and interpretation of an electrocardiogram.

(6) Education, counseling, and referral, as deemed appropriate by the physician or qualified nonphysician practitioner, based on the results of the
elements of the review and evaluation
services described in this section.

(7) Education, counseling, and referral, including a written plan provided to the individual for obtaining the appropriate screening and other preventive services for the individual that are covered as separate Medicare
Part B benefits as described in section 1861(s)(10), section 1861(jj), section 1861(nn), section 1861(oo), section 1861(pp), section 1861(qq)(1), section 1861(rr), section 1861(uu), section 1861(vv), section 1861(xx)(1), and section 1861(yy) of the Social Security Act (the Act).

Medical history is defined to include, at a minimum, the following:

(1) Past medical and surgical history, including experience with illnesses, hospital stays, operations, allergies, injuries, and treatments. (2) Current medications and supplements, including calcium and

vitamins.

(3) Family history, including a review of medical events in the patient ’ s family, including diseases that may be hereditary or place the individual at
risk.

Physician for purposes of this provision means a doctor of medicine or osteopathy (as defined in section 1861(r)(1) of the Act).

Qualified nonphysician practitioner for purposes of this provision means a physician assistant, nurse practitioner, or clinical nurse specialist (as
authorized under section 1861(s)(2)(K)(i) and section 1861(s)(2)(K)(ii) of the Act and defined in section 1861(aa)(5) of the Act, or in regulations at § 410.74, § 410.75, and § 410.76).

Review of the individual ’ s functional ability and level of safety. Review of the
individual ’ s functional ability and level of safety must include, at a minimum, a review of the following areas: (1) Hearing impairment. (2) Activities of daily living. (3) Falls risk. (4) Home safety.

Social history is defined to include, at a minimum, the following: (1) History of alcohol, tobacco, and

illicit drug use. (2) Work and travel history. (3) Diet. (4) Social activities. (5) Physical activities.

(b) Condition for coverage of an initial preventive physical examination. Medicare Part B pays for an initial preventive physical examination provided to an eligible beneficiary, as described in paragraph (a) of this section, if it is furnished by a physician or other qualified nonphysician practitioner, as defined in paragraph (a)
of this section.

(c) Limitations on coverage of initial preventive physical examinations. Payment may not be made for an initial preventive physical examination that is performed for an individual who is not an eligible beneficiary as described in paragraph (a) of this section.

B. Part 411 is amended as follows:

**PART 411**

**— EXCLUSIONS FROM** 
**MEDICARE AND LIMITATIONS ON**
**MEDICARE PAYMENT**

1. The authority citation for part 411
continues to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh).

2. Section 411.15 is amended by

—


### 50560 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

A. Republishing the introductory text of the section and the introductory text of paragraphs (a) and (k).

B. Revising paragraph (a)(1). C. Adding a new paragraph (k)(11).

The additions and revisions read as
follows:

**§ 411.15 Particular services excluded from** 

**coverage.**

The following services are excluded from coverage:

(a) Routine physical checkups such

as:

(1) Examinations performed for a purpose other than treatment or diagnosis of a specific illness, symptom, complaint, or injury, except for screening and diagnostic mammography, colorectal cancer screening tests, screening pelvic examinations, prostate cancer screening tests, glaucoma screening exams, or initial preventive physical examinations that meet the criteria specified in paragraph (k)(11) of this section.

* * * * *

(k) Any services that are not reasonable and necessary for one of the following purposes: * * *

(11) In the case of initial preventive physical examinations, with the goal of health promotion and disease prevention, subject to the conditions and limitations specified in § 410.16 of this chapter.

C. Part 419 is amended as follows:

**PART 419**

**— PROSPECTIVE PAYMENT** 
**SYSTEM FOR HOSPITAL OUTPATIENT**
**DEPARTMENT SERVICES**

1. The authority citation for Part 419
continues to read as follows: Authority: Secs. 1102, 1833(t), and 1871 of the Social Security Act (42 U.S.C. 1302, 1395l(t), and 1395hh).

2. Section 419.21 is amended by adding a new paragraph (e) to read as
follows:

**§ 419.21 Hospital outpatient services**  **subject to the outpatient prospective payment system.** 

* * * * *

(e) Effective January 1, 2005, an initial preventive physical examination, as
defined in § 410.16, if the examination is performed no later than 6 months
after the individual ’ s initial Part B coverage date that begins on or after January 1, 2005.

3. Section 419.22 is amended by adding a new paragraph (s) to read as
follows:

**§ 419.22 Hospital outpatient services**  **excluded from payment under the hospital outpatient prospective payment system.** 

* * * * *

(s) Effective December 8, 2003, screening mammography and effective January 1, 2005, diagnostic mammography services.

4. Section 419.64 is amended by revising paragraphs (d)(1) and (d)(2) to
read as follows:

**§ 419.64 Transitional pass-through**  **payments: Drugs and biologicals.**

* * * * *

(d) Amount of pass-through payment subject to any reduction determinedunder section 419.62(b), the passthrough payment for a drug or biological equals the amount determined under section 1842(o) of the Social Security Act, minus the portion of the APC that
CMS determines is associated with the drug or biological. 5. Section 419.70 is amended by revising the section heading and paragraphs (f)(2)(i) and (f)(2)(ii) to read
as follows:

**§ 419.70 Transitional adjustment to limit**  **decline in payments.**

* * * * *

(f) Pre-BBA amount defined.

* * * * *

(2) Base payment-to-cost ratio defined. * * *

(i) The provider ’ s payment under this part for covered outpatient services furnished during one of the following periods, including any payment for these services through cost-sharing described in paragraph (e) of this

section.

(A) The cost reporting period ending in 1996; or

(B) If the provider does not have a cost reporting period ending in 1996, the first cost reporting period ending on or after January 1, 1997, and before January 1, 2001; and

(ii) The reasonable costs of these services for the same cost reporting period.

* * * * *

(Catalog of Federal Domestic Assistance Program No. 93.773, Medicare

— Hospital Insurance; and Program No. 93.774,
Medicare

— Supplementary Medical Insurance Program)

Dated: July 27, 2004.
Mark B. McClellan, Administrator, Centers for Medicare &
Medicaid Services.

Dated: August 6, 2004. Tommy G. Thompson,
Secretary.

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### 50967 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules


### 50968 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules


### 50969 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules


### 50970 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules


### 50971 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules


### 50972 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules


### 50973 Federal Register / Vol. 69, No. 157 / Monday, August 16, 2004 / Proposed Rules

[FR Doc. 04

– 18427 Filed 8

– 9

– 04; 4:00 pm]

**BILLING CODE 4120**

**– 01** 

**– C**